Break-Even Point: Formula, Example, and Margin of Safety
October 21, 2026
The break-even point is the sales volume at which total revenue equals total costs. The formula is: break-even units = fixed costs ÷ (price per unit − variable cost per unit). With $10,000 in fixed costs, a $50 selling price, and $30 variable cost per unit, each unit contributes $20, so you need 10,000 ÷ 20 = 500 units, or $25,000 in revenue, to break even.
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Fixed costs do not change with output in the short run, such as rent, salaries, and software. Variable costs rise with each unit sold, such as materials and shipping. The difference between price and variable cost is the contribution margin per unit, which first pays off fixed costs and then becomes profit.
Break-even revenue can also be found from the contribution margin ratio: 20 ÷ 50 = 40%, so $10,000 ÷ 0.40 = $25,000.
Margin of Safety
The margin of safety shows how much sales can fall before reaching break-even. If you expect to sell 800 units, the margin of safety is (800 − 500) ÷ 800 = 37.5%. At 800 units, profit equals 300 × $20 = $6,000.
A thin margin of safety means a small drop in demand could lead to losses, so businesses with high fixed costs need to monitor it closely.
| Units sold | Revenue | Total costs | Profit |
|---|---|---|---|
| 300 | $15,000 | $19,000 | −$4,000 |
| 500 | $25,000 | $25,000 | $0 |
| 800 | $40,000 | $34,000 | $6,000 |
Using It to Make Decisions
Test price changes: raising the price to $55 increases the contribution to $25 and reduces break-even to 400 units, though demand may fall. Cutting variable cost by $5 has the same effect on contribution as raising the price by $5.
Break-even analysis assumes constant prices and costs, which is a simplification. Quantity discounts, step-fixed costs, and mixed product lines complicate the picture, so use it as a planning aid and not as a forecast.
Frequently Asked Questions
What is the break-even formula?
Fixed costs divided by contribution margin per unit, where contribution margin is the price minus variable cost.
What is a contribution margin?
The amount each unit sale contributes toward covering fixed costs and profit.
How can I lower my break-even point?
Raise prices, cut variable costs, or reduce fixed costs.
What is margin of safety?
The percentage by which sales can fall below expected levels before reaching break-even.