Explore the wider topic in our cash flow management guide.
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Break even point analysis: the formula
Break-even units = fixed costs ÷ contribution per unit. Contribution per unit is selling price less variable cost per unit. For sales dollars, divide fixed costs by the contribution margin ratio, which is contribution divided by sales.
Choose the period first. Monthly fixed costs need monthly sales assumptions. Use a consistent GST basis and define the costs included. An operating break-even calculation is different from a cash break-even calculation that includes financing and other cash commitments.
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Identify fixed and variable costs
Fixed costs stay broadly unchanged within the relevant activity range, such as a lease or a defined management salary. Variable costs change with the volume sold, such as materials or transaction-linked charges. Some costs are mixed or increase in steps when capacity is reached.
Do not classify a cost only by its name. Labour may be fixed for a staffed shift or variable for additional contracted work. Utilities can include both a base charge and usage. Use the behaviour that fits the decision and the period you are analysing.
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A worked break-even analysis example
A hypothetical business has monthly fixed costs of $30,000. It sells a unit for $100 and incurs $60 of variable cost per unit. Contribution is $40 per unit, or 40% of sales. Break-even volume is $30,000 ÷ $40 = 750 units. Break-even revenue is $30,000 ÷ 40% = $75,000.
At 1,000 units, revenue is $100,000, variable costs are $60,000 and fixed costs are $30,000. The result is $10,000 above the defined cost base. The margin of safety is 250 units, or 25% of the 1,000-unit sales level. All amounts are illustrative NZD figures.
| Units sold | Revenue | Total defined costs | Result |
|---|---|---|---|
| 500 | $50,000 | $60,000 | −$10,000 |
| 750 | $75,000 | $75,000 | $0 |
| 1,000 | $100,000 | $90,000 | $10,000 |
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Break-even calculator
Enter fixed costs, unit selling price and unit variable cost for one consistent period. The calculator rounds required units up to the next whole unit. If contribution is zero or negative, increasing volume alone cannot cover positive fixed costs under those assumptions.
Use the result as a test of your inputs. Test customer demand, funding availability and the selling price separately.
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Build the calculation in Excel or a spreadsheet
- Put fixed costs in B2, unit price in B3 and unit variable cost in B4.
- Calculate contribution in B5 with
=B3-B4. - Calculate whole break-even units with
=IF(B5>0,ROUNDUP(B2/B5,0),"No positive contribution"). - Calculate break-even sales with
=IF(B5>0,B2/(B5/B3),"Check inputs"), using a positive selling price. - Add scenarios for price, variable cost and fixed cost, keeping the period consistent.
For a chart, put sales volume on the horizontal axis and dollars on the vertical axis. Plot revenue as price × units and total cost as fixed costs + variable cost × units. Their intersection is the break-even point. The table above supplies three points for the example.
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Test sensitivity and capacity
If the example's variable cost rises to $70, contribution falls to $30 and break-even volume rises to 1,000 units. If capacity is only 900 units, the current assumptions cannot reach break-even without another change. Price, product mix, costs or capacity need to be reconsidered.
For multiple products, use a realistic sales mix and weighted contribution margin. A shift toward lower-margin products can increase required revenue even when total sales rise. Use scenario planning to compare changes rather than assuming one average margin will remain stable.
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Connect the result with profit and cash
The calculation covers the costs you included. It does not automatically include income tax, loan principal, capital purchases or the timing of collections and payments. A business can reach an accounting break-even point and still need funding.
Use cash flow forecasting alongside the analysis, and review the wider causes of performance through business performance diagnosis. Our cash flow management guide connects these tools with practical owner decisions.
Common questions
What if variable cost is higher than selling price?
Each extra unit reduces the result under those assumptions. There is no finite break-even volume for positive fixed costs until price, variable cost or the business model changes.
Can a service business use break-even analysis?
Yes. Define a meaningful unit, such as a job or billable hour, and model the relevant contribution and capacity. Be careful with labour and other costs that are fixed within a period.
Does break-even revenue mean the business has enough cash?
No. Payment timing, debt repayments, tax and investment can create cash needs outside the defined cost base. Use a cash forecast as well.
Your next move
Test the economics of your next decision
Bring your price, cost and capacity assumptions. We can help test the break-even point and identify which changes would make the commercial decision more workable.
Test the economics of your next decision