1. What Is the Breakeven Formula?
The breakeven formula is a financial calculation used to determine when your total revenues exactly equal your total costs—no profit, no loss. This point is called the break-even point (BEP).
2. Why the Breakeven Formula Matters
Understanding your break-even point helps you:
- Set realistic sales targets
- Price products correctly
- Control fixed and variable costs
- Make informed business decisions
- Plan for profit beyond your breakeven
3. The Basic Breakeven Formula
The most common version is:
Break-Even Point (Units) = Fixed Costs ÷ (Selling Price per Unit – Variable Cost per Unit)
Where:
- Fixed Costs = Costs that stay the same (e.g., rent, salaries)
- Selling Price per Unit = Price you charge customers
- Variable Cost per Unit = Cost that changes per unit sold (e.g., materials, packaging)
4. Example of the Breakeven Formula in Use
Suppose:
- Fixed Costs = £10,000/month
- Selling Price per Unit = £50
- Variable Cost per Unit = £30
Then:
BEP = £10,000 ÷ (£50 – £30) = 500 units
So, you must sell 500 units per month to break even.
5. Breakeven Formula in Revenue Terms
You can also calculate break-even in terms of sales revenue:
Break-Even Revenue = Fixed Costs ÷ Contribution Margin Ratio
Where:
- Contribution Margin Ratio = (Selling Price – Variable Cost) ÷ Selling Price
Using the same figures:
- Contribution Margin = (£50 – £30) ÷ £50 = 0.4
- Break-Even Revenue = £10,000 ÷ 0.4 = £25,000
So, you need £25,000 in monthly sales to break even.
6. Limitations of the Breakeven Formula
- Assumes costs remain constant (not always true in scale)
- Only works with one product or consistent product mix
- Doesn’t account for unexpected costs or returns
- Assumes all produced units are sold
Still, it’s a powerful starting point for financial planning.
7. Breakeven Analysis and Decision-Making
Use breakeven analysis to:
- Test different pricing models
- Assess the impact of higher costs or discounts
- Compare scenarios (new product vs. current one)
- Set financial goals that ensure profitability
Frequently Asked Questions
What’s the difference between fixed and variable costs?
Fixed costs stay the same regardless of sales. Variable costs increase as you sell more.
Can I use the breakeven formula for services?
Yes, as long as you can define a “unit” of service and the associated costs.
What’s a good breakeven point?
Lower is better—it means you reach profitability faster. Aim to break even within your first 6–12 months if possible.
Does breakeven include tax or profit?
No. It shows when profit is zero—before tax or profit are considered.
Can breakeven help with investment planning?
Yes. It helps you demonstrate how much you need to sell to repay startup costs or investor funding.
How often should I calculate it?
Regularly—especially when prices, costs, or products change.
Conclusion
The breakeven formula is a must-know tool for any business owner. By calculating how much you need to sell to cover your costs, you make better pricing, spending, and growth decisions. Whether you’re starting up or scaling, knowing your break-even point sets the foundation for sustainable success.