Break-Even Formula
Learn the break-even units formula using fixed costs, selling price and variable cost per unit.
Break-even units = fixed costs ÷ (price per unit − variable cost per unit)What the formula means.
Each unit contributes the selling price minus its variable cost toward fixed costs. Divide total fixed costs by that contribution per unit to estimate how many units are needed before modeled profit reaches zero.
Contribution margin per unit must be positive.
Break-even is a model, not a guarantee of cash-flow timing.
A target-profit model adds desired profit to fixed costs before dividing.
Variables.
FCosts that do not change directly with each unit in the model.
PRevenue received for one unit.
VCost that changes with each unit.
Worked example.
- $50 − $30 = $20 contribution per unit
- $5,000 ÷ $20 = 250 units
Common mistakes.
- Using total cost instead of variable cost per unit.
- Ignoring a zero or negative contribution margin.
- Treating accounting break-even as the same as cash break-even.
Quick questions.
How do I include a target profit?
Add the target profit to fixed costs, then divide by contribution per unit.
What if variable cost is higher than price?
The modeled contribution is negative, so selling more units does not create a standard break-even point.