How to calculate (and interpret) break-even point

Many tools are available for forecasting and cost evaluation, but few are as important as a break-even analysis.

The break-even point is the moment your business covers all its costs. It’s when total revenue equals total expenses. At this point, you're not making a profit, but you're not losing money either. It’s the baseline every business needs to understand.

Knowing your break-even point helps you price products, control spending, and make confident financial decisions.

What is break-even analysis?

Break-even analysis helps owners and managers to determine the target to hit before turning a profit.

Break-even analysis considers various factors to determine how many units a company needs to sell or how much money it must earn to cover its costs. When conducting a break-even analysis, managers should consider sales price, variable and fixed costs, and the contribution margin per sales unit.

An organization that doesn't break even will result in losses, while a business that exceeds the break-even point will produce a profit.

Business owners and managers use the results from break-even analysis to determine the potential profitability of a product line or service. Using the details obtained from the report, business owners can evaluate the feasibility of the organization to generate a return through product sales.

Break-even formula and calculation

Business owners can calculate a company's break-even point in units sold or in the amount of earned revenue. If you're looking to learn how to calculate your break-even point, you can use one of the two formulas below.

Break-even quantity

The break-even quantity determines how many units a business must sell before it becomes profitable. If you want to calculate the break-even points in units, use the following formula:

Fixed Costs / (Sales Price per Unit - Variable Cost per Unit) = Break-even Quantity

Total fixed costs represent overhead and administrative expenses that remain the same no matter how many units the company sells. Typical fixed costs include rent, executive salaries, and ERP software expenses.

Variable costs are the direct expenses of producing a unit, such as raw materials and hourly labor costs. Total variable costs go up and down depending on how many units the business creates.

Consider the break-even analysis example here:

An Italian restaurant plans to open a business selling only one product, the Vegetarian Deluxe pizza. The variable costs associated with preparing a single Vegetarian Deluxe pizza are $4. The sales price for the pizza is $12. The restaurant has monthly fixed costs of $1,500 for rent, $2,000 for salaries, and $100 for software. The number of sales to break even for this restaurant is 450 pizzas, as calculated below:

($1,500 + $2,000 + $100 Fixed Costs) / ($12 Sales Price per Unit - $4 Variable Costs) = 450 Break-even Units

So, if the restaurant has a sales volume of 450 Vegetarian Deluxe pizzas per month, it will make enough revenue to cover its costs. If the restaurant sells more pizzas, it will earn a profit. If it sells fewer pizzas, it will lose money.

Break-even point in dollars

Managers can also calculate the break-even point in total revenue. The formula for calculating the break-even point by the amount of sales revenue is:

Sales Price per Unit x Break-even Quantity Units = Break-even Point in Total Revenue

Using the previous example, the break-even point in revenue is $5,400.

$12 Sales Price per Unit x 450 Break-even Quantity Units = $5,400 Break-even Point in Sales Dollars

How to do a break-even analysis

Break-even analysis is typically handled by anyone who is responsible for setting budgets, pricing, or forecasting revenue. For smaller businesses, it’s often the founder or general manager. In larger companies, FP&A teams run break-even models to guide product launches, market expansion, or cost reviews.

Step 1: Identify your fixed costs

Fixed costs are expenses that stay the same no matter how much you sell. These can include rent, salaries, insurance, business licenses, software subscriptions, and equipment leases. For example, if you pay $2,000 in rent, $6,000 in salaries, and $2,000 for other overhead each month, your total fixed costs are $10,000. This is the baseline amount your revenue needs to cover before you can earn a profit.

Step 2: Calculate your variable cost per unit

Variable costs change depending on how many units you produce or sell. These might include raw materials, packaging, shipping, manufacturing labor, or credit card processing fees. If it costs $15 to produce and deliver one unit of your product, that’s your variable cost per unit.

Step 3: Define your selling price per unit

This is how much you charge customers for each unit you sell. It should reflect the market rate, your costs, and your desired margin. For instance, if you charge $30 for each product sold, use that number as your unit price. If you sell multiple products or offer services, use the average selling price or run separate analyses for each.

Step 4: Apply the break-even formula

To calculate your break-even point, divide your total fixed costs by the difference between your selling price and your variable cost per unit. This difference is called your contribution margin, which is the amount each sale contributes toward covering fixed costs. Using our example, the break-even point comes to 667 units. This means you need to sell 667 units to cover all of your expenses. Every unit sold beyond that adds directly to your profit.

Step 5: Review and interpret your results

This number gives you a concrete sales goal. If 667 units seems out of reach, you may need to raise your prices, reduce fixed costs, or lower your variable costs. For example, switching to a more efficient supplier or reducing software subscriptions could move your break-even point closer.

How managers use the break-even analysis

Managers revisit break-even analysis regularly. Many run the numbers during quarterly planning, before launching a new product, or when costs or pricing change.

• Understand and manage costs. Managers use break-even analysis to break down fixed and variable costs. This helps them see how many units need to be sold to cover expenses and start generating profit. If the break-even point is too high, it signals a need to cut unnecessary costs or find operational efficiencies.
• Set budgets and sales targets. Once the break-even point is clear, managers can set more accurate revenue goals and spending limits. It creates a financial baseline that supports planning, especially during forecasting or when launching new products. This insight is essential for department heads building quarterly budgets or sales managers creating performance targets tied to profitability.
• Improve team alignment and accountability. Managers often share break-even data with their teams to reinforce goals. Sales managers can focus efforts around reaching the required unit volume, while operations leads can explore ways to reduce production costs. This creates cross-functional alignment and ensures every team works toward improving the bottom line.
• Refine pricing strategy. Break-even analysis helps them test how different pricing scenarios affect profit thresholds. Even small changes to pricing can shift the balance between healthy margins and customer demand, making it essential to evaluate pricing decisions carefully. Managers also use this analysis to avoid pricing missteps, like raising prices too high can reduce sales volume, while lowering them too far can strain capacity and resources.

Why break-even analysis is important for startups

A new business must find its footing before it's able to grow its customer base. A break-even analysis calculation forces small business owners to examine the components of their business plan and business idea, including pricing strategy and startup costs. Using the information from the analysis, managers can determine if the company is likely to make enough sales to cover its monthly business expenses.

Break-even analysis isn't just appropriate for pricing and cost analysis—it can also help businesses to attract potential capital. Many startups need funding from investors or banks to scale the company for growth. To attract investors, the company will need a comprehensive set of financials and a complete break-even analysis to help lenders understand the challenges that the business faces and determine if they can help.

Commonly, startups seek financial assistance from lenders and investors through business loans, programmatic funding, and venture capital. Alternative funding sources such as startup corporate cards, inventory financing, and accounts receivable financing are also viable options.

Ramp can strengthen investor confidence by streamlining how startups track and report financial data. With automated transaction coding and real-time reporting, founders can present accurate break-even models and forecasts during fundraising.

What a break-even analysis doesn't tell you

Break-even analysis doesn’t reveal whether your target market is large enough to reach that point. When used alone, it can give a false sense of security. That’s why break-even analysis should be one of several tools used to guide financial decisions, not the only one.

Garbage in, garbage out

Like any mathematical formula, the break-even analysis is only as accurate as the details used to calculate it. Inaccurate variable and fixed costs will leave managers with an incorrect break-even quantity that doesn't accurately reflect the company's needs to turn a profit.

Your accounting team needs to maintain accurate records of each period and ensure the proper recording of all expenses. Without meticulous bookkeeping, break-even analyses are useless.

Long-term analysis

Remember that a break-even analysis is fixed and relies on cost and sales price details that may change in the future. It's vital for businesses to regularly update the factors used in break-even analysis as circumstances change. Hiring new employees, purchasing new technology, and changing the sales price for a product all impact the results of break-even reporting.

Sales price changes and discounts

It's not uncommon for organizations to provide discounts to their customers if they purchase products in bulk. For instance, a company may decide to offer clients a deal if they buy a certain quantity of the product at once. Break-even analysis does not account for selling price modifications.

Companies that use discounts to attract more customers must consider how the markdown impacts their break-even unit point.

Use break-even insights to guide better decisions

Your break even point is not just a one-time calculation. Instead, it is a key decision-making tool. It helps you adjust pricing, control costs, and set clear sales goals backed by real numbers.

Around 38% of startups fail because they run out of cash. Break-even analysis helps prevent that by showing exactly what it takes to stay above water.

Ramp supports this process by giving you real-time visibility into expenses, automated cost categorization, and accurate, up-to-date financial data. Instead of sorting through spreadsheets, you get the clarity you need to run smarter break-even models and act fast when costs or market conditions shift.

Use break-even insights to guide better decisions. With the right tools and clean data, you can build a more resilient, cost-conscious business that’s set up to grow.