What is the break-even point?
The break-even point (BEP) is where income exactly covers all costs. Below it, the business loses money; above it, every extra sale adds profit. It is a core tool of cost-volume-profit (CVP) analysis.
Formulas
Break-even units = Fixed costs ÷ (Selling price per unit − [Variable cost](/glossary/variable-cost) per unit)
The figure in brackets is the contribution margin per unit.
Break-even sales = Fixed costs ÷ Contribution margin ratio
where contribution margin ratio = (Price − Variable cost) ÷ Price.
Example
A bakery sells cakes at $25 each. Ingredients and packaging cost $10 per cake, and monthly fixed costs (rent, salaries, utilities) are $6,000.
- Contribution margin = 25 − 10 = $15 per cake
- Break-even = 6,000 ÷ 15 = 400 cakes a month
- Break-even sales = 400 × 25 = $10,000
Selling 500 cakes gives a profit of 100 × $15 = $1,500.
How to use it
- Pricing: see how a price change moves the break-even point.
- Planning: set realistic sales targets and staffing.
- New products or locations: test whether a plan is viable before you invest.
- Margin of safety: (Actual sales − Break-even sales) ÷ Actual sales shows how far sales can fall before losses start.
Limitations
It assumes costs are cleanly fixed or variable, prices are constant and everything produced is sold. Treat it as a planning guide, not a forecast.