---
title: "Break-Even Analysis: How to Calculate the Break-Even Point, With Examples"
description: "Break-even analysis with worked examples: break-even point in units and revenue, contribution margin, margin of safety, operating leverage and several products."
canonical: https://ledgeriano.com/guides/break-even-analysis
language: en
publisher: "Ledgeriano"
published: 2026-11-06
updated: 2026-11-06
---

# Break-Even Analysis: How to Calculate the Break-Even Point, With Examples

> Break-even analysis with worked examples: break-even point in units and revenue, contribution margin, margin of safety, operating leverage and several products.

The break-even point is the sales level where revenue equals total costs and profit is zero. In units it is fixed costs divided by the contribution margin per unit; in revenue it is fixed costs divided by the contribution margin ratio. Every unit sold above it adds its contribution margin to profit.

## Key takeaways

- Break-even units = fixed costs ÷ (price - variable cost per unit); break-even revenue = fixed costs ÷ contribution margin ratio.
- Margin of safety shows how far sales can fall before a loss, and it is the inverse of the degree of operating leverage.
- For a target profit, add it to fixed costs; for an after-tax target, divide by (1 - tax rate) first.
- With several products, use the weighted average contribution margin of the sales mix, and recalculate when the mix shifts.
- Price changes move break-even the most: a 10% price cut can require over 20% more volume to keep the same profit.
- Ledgeriano's CVP analysis calculates break-even, margin of safety, leverage, targets and what-ifs from your posted entries or a budget.

The break-even point is the level of sales at which total revenue equals total costs, so profit is zero. In units it is fixed costs divided by the contribution margin per unit (selling price minus variable cost per unit). In revenue it is fixed costs divided by the contribution margin ratio. Every unit sold above break-even adds its contribution margin to profit.

This guide works through the formulas with one small business, then covers margin of safety, operating leverage, target profit before and after tax, several products, a sensitivity table, cash break-even and the limits of the model. The last section shows how Ledgeriano's cost-volume-profit (CVP) analysis calculates the same figures from your books. The [management accounting guide](https://ledgeriano.com/guides/management-accounting) places break-even next to budgets, segment reporting and decision analysis.

## At a glance: break-even formulas

| Measure | Formula |
|---|---|
| Contribution margin per unit | Selling price - variable cost per unit |
| Contribution margin ratio | Contribution margin ÷ selling price (or total contribution ÷ revenue) |
| Break-even point in units | Fixed costs ÷ contribution margin per unit |
| Break-even point in revenue | Fixed costs ÷ contribution margin ratio |
| Units for a target profit | (Fixed costs + target profit) ÷ contribution margin per unit |
| Pre-tax profit for an after-tax target | After-tax target ÷ (1 - tax rate) |
| Margin of safety | Actual or budgeted sales - break-even sales (also as % of sales) |
| Degree of operating leverage | Contribution margin ÷ operating profit |
| Multi-product break-even | Fixed costs ÷ weighted average contribution margin per unit |

## Why break-even matters

Break-even is the first number a lender, investor or owner asks for when a plan changes: a new location, a price cut, a hire. It answers "how much do we have to sell before this pays for itself?" in one figure. It also matters because early years are fragile: of the US private-sector establishments that opened in March 2013, about one in five had closed a year later and only 34.7% were still operating in March 2023, according to the [US Bureau of Labor Statistics](https://www.bls.gov/opub/ted/2024/34-7-percent-of-business-establishments-born-in-2013-were-still-operating-in-2023.htm) (published January 2024). Knowing the sales level that covers your costs is basic survival arithmetic.

## Step 1: split costs into fixed and variable

Break-even analysis only works once every cost is classified by behaviour:

- **Variable costs** change in total with each unit sold: materials, packaging, piece-rate labour, card fees, sales commission.
- **Fixed costs** stay the same in total within a normal range of activity: rent, salaried staff, insurance, software subscriptions, depreciation.
- **Mixed costs** have both parts and must be split, for example electricity with a standing charge and a usage charge.

Our example is a screen-printing shop that prints custom T-shirts for clubs, schools and events. Amounts are in USD per month.

| Cost | Behaviour | Amount |
|---|---|---|
| Blank shirt | Variable | 4.50 per shirt |
| Ink and screens | Variable | 1.00 per shirt |
| Printer piece rate | Variable | 1.50 per shirt |
| Packaging and card fees | Variable | 1.00 per shirt |
| **Total variable cost** | | **8.00 per shirt** |
| Workshop rent | Fixed | 4,500 |
| Salaries (manager, designer) | Fixed | 9,000 |
| Depreciation of the printing press | Fixed | 1,000 |
| Insurance, software, utilities standing charges | Fixed | 1,500 |
| **Total fixed costs** | | **16,000** |

The average selling price is **18.00** a shirt.

## Step 2: calculate the contribution margin

The contribution margin is what each sale leaves after its own variable costs, available first to cover fixed costs and then to produce profit.

- Contribution margin per shirt: 18.00 - 8.00 = **10.00**
- Contribution margin ratio: 10.00 ÷ 18.00 = **55.6%**

> **Definition:** Contribution margin is selling price minus variable cost per unit. It is the amount each unit sold contributes towards fixed costs and, once they are covered, towards profit.

## Step 3: calculate the break-even point

- **In units:** 16,000 ÷ 10.00 = **1,600 shirts a month**
- **In revenue:** 16,000 ÷ (10.00 ÷ 18.00) = **28,800** (the same as 1,600 × 18.00)
- **Per trading day:** with 26 trading days, 1,600 ÷ 26 ≈ **62 shirts a day**

The daily figure is the one the shop manager can act on. On a day with an order of 40 shirts and no walk-ins, the shop is behind; a club order of 300 shirts covers almost five days of fixed costs.

## Step 4: margin of safety and operating leverage

The shop budgets 2,400 shirts a month.

| Line | Amount |
|---|---|
| Revenue (2,400 × 18.00) | 43,200 |
| Variable costs (2,400 × 8.00) | (19,200) |
| **Contribution margin** | **24,000** |
| Fixed costs | (16,000) |
| **Operating profit** | **8,000** |

- **Margin of safety:** 43,200 - 28,800 = **14,400**, or 33.3% of budgeted sales. Sales can fall by a third before the shop loses money.
- **Degree of operating leverage (DOL):** 24,000 ÷ 8,000 = **3.0**. A 10% change in sales moves operating profit by about 30%. Selling 2,640 shirts (10% more) gives profit of 26,400 - 16,000 = 10,400, which is 30% above 8,000.

Notice that the margin of safety percentage is the inverse of operating leverage (33.3% = 1 ÷ 3.0). A business with high fixed costs and a thin margin of safety has high leverage: profits swing hard in both directions.

## Step 5: target profit, before and after tax

To earn a target profit, add it to fixed costs before dividing by the contribution margin.

- **Pre-tax target of 12,000 a month:** (16,000 + 12,000) ÷ 10.00 = **2,800 shirts**, or 50,400 of revenue.
- **After-tax target of 10,500 at a 25% tax rate:** first gross it up: 10,500 ÷ (1 - 0.25) = 14,000 before tax. Then (16,000 + 14,000) ÷ 10.00 = **3,000 shirts**.

## Break-even with several products

Most businesses sell more than one product, and the products rarely have the same contribution margin. The shop also prints hoodies at 40.00 with a variable cost of 22.00, a contribution of **18.00**. By units, 80% of sales are shirts and 20% are hoodies.

**Weighted average contribution margin per unit:** 0.80 × 10.00 + 0.20 × 18.00 = 8.00 + 3.60 = **11.60**

**Break-even in units:** 16,000 ÷ 11.60 = 1,379.3, so about **1,380 garments**: 1,104 shirts and 276 hoodies. Check: 1,104 × 10.00 + 276 × 18.00 = 11,040 + 4,968 = 16,008, just above fixed costs.

**Break-even in revenue:** the average revenue per garment is 0.80 × 18.00 + 0.20 × 40.00 = 22.40, so the weighted contribution margin ratio is 11.60 ÷ 22.40 = 51.8% and break-even revenue is 16,000 ÷ 51.8% ≈ **30,900**.

The result holds only for that mix. If a school orders mostly shirts and the mix moves to 90/10, the weighted margin falls to 10.80 and break-even rises to about 1,482 garments, with no change in prices or costs. Watch the mix as closely as the volume.

## Sensitivity: what moves break-even the most?

Break-even is most useful as a what-if tool. Here is the single-product shop at its budget of 2,400 shirts:

| Scenario | CM per shirt | Fixed costs | Break-even (shirts) | Profit at 2,400 shirts |
|---|---|---|---|---|
| Base case | 10.00 | 16,000 | 1,600 | 8,000 |
| Price +10% (19.80) | 11.80 | 16,000 | 1,356 | 12,320 |
| Price -10% (16.20) | 8.20 | 16,000 | 1,952 | 3,680 |
| Variable cost +10% (8.80) | 9.20 | 16,000 | 1,740 | 6,080 |
| Second press operator (+2,000 fixed) | 10.00 | 18,000 | 1,800 | 6,000 |
| Fixed costs -10% | 10.00 | 14,400 | 1,440 | 9,600 |

Price is the strongest lever because it flows straight into the contribution margin. A 10% price cut needs (16,000 + 8,000) ÷ 8.20 ≈ **2,927 shirts** just to keep profit at 8,000: 22% more volume to stand still. That calculation is worth doing before any discount campaign.

## Cash break-even

Depreciation is a cost but not a cash payment. Cash break-even leaves it out of fixed costs and adds cash outflows that are not expenses, such as loan principal repayments:

- Accounting break-even: 16,000 ÷ 10.00 = 1,600 shirts
- Cash break-even without depreciation: (16,000 - 1,000) ÷ 10.00 = **1,500 shirts**
- Cash break-even with a 2,000 monthly loan repayment: (15,000 + 2,000) ÷ 10.00 = **1,700 shirts**

A business can be above accounting break-even and still run out of cash if customers pay late or stock builds up. The cash budget, not the break-even chart, answers that question.

## Reading a break-even chart

A CVP chart plots revenue and total cost against volume. The total cost line starts at the fixed cost level (16,000) and rises by the variable cost per unit; the revenue line starts at zero and rises by the selling price. They cross at break-even (1,600 shirts, 28,800). The vertical gap to the right of the crossing is profit, to the left is loss. A profit-volume chart shows the same information as one line that starts at -16,000 and crosses zero at 1,600.

## What are the limitations of break-even analysis?

Break-even analysis is a planning model, not a forecast. It rests on assumptions that hold only within a **relevant range**:

1. **Linear costs and prices.** Volume discounts on blanks or price breaks for large orders bend the lines.
2. **Step-fixed costs.** Above about 3,000 shirts a month the shop needs a second printer operator, so fixed costs jump.
3. **Constant sales mix** when there are several products.
4. **Stable inventory.** If production and sales differ, absorption costing moves fixed overhead into stock and the reported profit no longer follows the CVP line.
5. **Clean cost classification.** Mixed costs split by rough estimate make the result rough too.
6. **No time value.** It ignores when cash comes in and goes out.

Used with these limits in mind, it remains one of the fastest ways to test a plan.

## Common break-even mistakes

- **Treating every cost of sales line as variable** without checking: salaried production staff are usually fixed.
- **Using gross margin instead of contribution margin.** Gross margin after absorbed overhead mixes fixed costs into the unit cost.
- **Ignoring the mix** in a multi-product business.
- **Forgetting tax** when a lender or investor asks for an after-tax target.
- **Calculating once.** Break-even moves every time a price, wage or rent changes; recalculate with each budget and each [monthly variance review](https://ledgeriano.com/guides/budget-vs-actual-variance-analysis).

## How Ledgeriano calculates break-even and CVP

Ledgeriano's cost-volume-profit analysis is part of its management accounting tools, available to every business in the dashboard and through the [accounting API](https://ledgeriano.com/developers). It reads posted entries, so you do not rebuild the numbers in a spreadsheet.

- **Cost behaviour on accounts.** Each expense account is marked fixed, variable or mixed (with a variable percentage). Unclassified accounts default sensibly: cost of sales is variable, other expenses are fixed.
- **Actual or budget.** Run the analysis on actual results for a date range or on a budget for a range of months.
- **Results.** Revenue, variable costs, contribution margin and ratio, fixed costs, operating income, break-even revenue, margin of safety in amount and percentage, and degree of operating leverage.
- **Targets and what-ifs.** Enter a target profit, with an optional tax rate for an after-tax target, and apply what-if changes to price, volume, variable cost (all in percent) and fixed costs (as an amount).
- **Products.** With the [inventory module](https://ledgeriano.com/guides/inventory-cost-accounting) switched on, the report breaks results down by product (units sold, price, variable cost and contribution per unit, sales mix), with the weighted average contribution margin and break-even units per product for the current mix.
- **Chart.** A CVP chart series with revenue, total cost and fixed cost lines from zero to twice break-even.

The [features page](https://ledgeriano.com/features) has the overview, and the [glossary](https://ledgeriano.com/glossary) defines the terms.

## How to calculate a break-even point

1. **Classify costs**: Split every cost into fixed and variable, and divide mixed costs into their fixed and variable parts.
2. **Find the contribution margin**: Subtract variable cost per unit from the selling price, and divide the result by the price for the contribution margin ratio.
3. **Divide fixed costs**: Fixed costs divided by the contribution margin per unit gives break-even units; divided by the ratio it gives break-even revenue.
4. **Check the margin of safety**: Compare budgeted sales with break-even sales to see how far sales can fall before a loss.
5. **Add targets and scenarios**: Add a target profit to fixed costs, gross up after-tax targets, and test changes in price, volume, variable cost and fixed costs.
6. **Recalculate regularly**: Update the analysis when prices, costs or the sales mix change, and at every budget.

## Frequently asked questions

### How do you calculate the break-even point?

Divide total fixed costs by the contribution margin per unit, which is the selling price minus the variable cost per unit. With fixed costs of 16,000 and a contribution margin of 10.00 a unit, the break-even point is 1,600 units.

### What is the break-even point in sales revenue?

Fixed costs divided by the contribution margin ratio. If fixed costs are 16,000 and each sale leaves 55.6% of its price as contribution, break-even revenue is 28,800. It equals break-even units multiplied by the selling price.

### What is the difference between contribution margin and gross margin?

Contribution margin subtracts only variable costs from revenue. Gross margin subtracts cost of goods sold, which under absorption costing also includes fixed production overhead. Break-even analysis needs the contribution margin.

### What is the margin of safety?

The amount or percentage by which actual or budgeted sales exceed break-even sales. A margin of safety of 33% means sales could fall by a third before the business makes a loss.

### How do you calculate break-even for multiple products?

Calculate a weighted average contribution margin per unit using the expected sales mix, then divide fixed costs by it. Split the resulting units across products in the same mix. If the mix changes, the break-even point changes too.

### What is the degree of operating leverage?

Contribution margin divided by operating profit. It tells you by how much operating profit changes for a given percentage change in sales. A DOL of 3 means a 10% rise in sales lifts operating profit by about 30%.

### What are the limitations of break-even analysis?

It assumes linear revenue and costs, a constant sales mix, stable inventory levels and a clean split of fixed and variable costs, all within a relevant range. Step costs, volume discounts and timing of cash flows are outside the model.

### What is cash break-even?

The sales level at which cash inflows cover cash outflows. It excludes non-cash costs such as depreciation from fixed costs and adds cash payments that are not expenses, such as loan principal repayments.