The breakeven point is the level of sales at which a business covers all its costs and starts making a profit. Below it you make a loss; above it you make a profit. The calculation needs three inputs: total fixed costs (rent, salaries, insurance, software subscriptions — costs that don’t change with sales volume), the price per unit, and the variable cost per unit (materials, packaging, payment fees, commission — costs that change with each unit sold). The breakeven formula is: Fixed Costs / (Price − Variable Cost). This calculator runs the formula in units and revenue terms, and shows what additional sales translate to as profit above breakeven.
How breakeven analysis works
The intuition: every unit you sell generates a “contribution” — the price minus the variable cost — that goes towards covering fixed costs. Once enough units have been sold to cover all fixed costs, every additional unit’s contribution becomes profit.
The formula in units:
Breakeven units = Fixed Costs / (Price per unit − Variable cost per unit)
The denominator (Price minus Variable cost) is the “contribution per unit”. If your fixed costs are £30,000, your selling price is £50 and your variable cost is £20 per unit, your contribution per unit is £30. Breakeven units = £30,000 / £30 = 1,000 units.
The formula in revenue:
Breakeven revenue = Fixed Costs / Contribution margin %
Where contribution margin % = Contribution per unit / Price per unit. In the example above, contribution margin % = £30/£50 = 60%. Breakeven revenue = £30,000 / 0.6 = £50,000.
Both formulas give the same point; you choose whichever is more useful for your business.
Fixed vs variable costs
Categorising costs is the harder part of the calculation. Some are obvious:
- Clearly fixed: rent, salaries, insurance, accountancy, software subscriptions, depreciation.
- Clearly variable: cost of goods sold (materials, manufacturing), packaging, shipping, payment processing fees, sales commission.
Some are mixed. Utilities have a base standing charge (fixed) and a usage charge (variable). Vehicle costs include insurance and tax (fixed) and fuel and maintenance (variable). Phone and broadband often have a base contract (fixed) plus call/data usage (variable). For breakeven analysis, split mixed costs into their fixed and variable components — usually by inspecting historical bills.
Some costs are stepped — fixed up to a certain volume, then jumping. A second salesperson is fixed when hired but represents a step up in fixed costs from the previous year. For breakeven analysis you usually take the current period’s actual fixed costs and assume they hold for the relevant volume range.
Worked example: small bakery
A bakery selling artisan loaves at £6 each. Variable cost per loaf: £1.80 in flour, packaging, electricity for the oven and packaging. Contribution per loaf: £4.20.
Fixed costs per month:
- Rent £1,800
- Baker’s salary £2,500 (including employer NI and pension)
- Insurance £150
- Equipment lease £400
- Other (cleaning, bookkeeping, marketing) £250
- Total: £5,100
Breakeven loaves per month: £5,100 / £4.20 = 1,215 loaves.
That’s about 40 loaves a day. The bakery owner can now ask: is 40 loaves a day achievable given local foot traffic, current customer base and seasonal patterns? If average sales are 50 a day, breakeven is comfortably exceeded and each extra 10 loaves a day generates £42 of profit per day, or £1,260 per month.
What breakeven doesn’t tell you
Breakeven is a useful sanity check but has limitations:
- It’s static: assumes all variables stay constant. In reality fixed costs change, prices change, variable costs change. Sensitivity analysis is more useful for forward planning.
- It treats all units equally: assumes a single price and a single variable cost. Most businesses sell multiple products with different margins. Weighted-average contribution margin handles this but adds complexity.
- It doesn’t account for cash flow: a business can be operationally profitable above breakeven but still go bankrupt if customers pay slowly and suppliers demand payment fast.
- It ignores capital: the investment required to set up the business and the return needed on that capital. Breakeven is the operating level; investors care about the level above breakeven that justifies the capital invested.
For a robust business plan, breakeven sits alongside cash flow forecasting, market sizing and capital return analysis — not in place of them.
Service businesses
The breakeven formula is the same for service businesses, but variable cost per unit is often very low. A consultant charging £600 per day with negligible variable cost (perhaps £20 of mileage or coffee) has a contribution per day of £580. If their fixed overhead is £30,000 per year, they break even at £30,000 / £580 = 52 billable days per year. The challenge for service businesses is rarely breakeven — it’s filling the calendar.
For service breakeven analysis, the calculator on this page treats “billable hours” or “billable days” as the unit and the day rate as the price.
Sensitivity: what happens if the price drops?
Breakeven is highly sensitive to the contribution per unit. A 10% drop in price affects breakeven much more than a 10% drop in volume.
Same bakery: £6 loaf, £1.80 cost, £4.20 contribution, 1,215 breakeven loaves at £5,100 fixed cost.
Drop the price by 10% to £5.40. Contribution: £3.60. Breakeven: £5,100 / £3.60 = 1,417 loaves. A 17% increase in volume needed to keep breakeven flat after a 10% price cut.
This is why discounting is more dangerous than it looks. Cutting prices to “boost volume” needs the volume increase to outpace the breakeven impact of the price cut, often by a significant margin.
Key takeaways
- Breakeven units = Fixed Costs / (Price − Variable Cost).
- Breakeven revenue = Fixed Costs / Contribution Margin %.
- Categorising costs as fixed or variable is the hardest part; mixed costs need splitting.
- Breakeven is sensitive to price changes — small price cuts require disproportionate volume increases.
- Breakeven sits alongside cash flow and capital return analysis, not in place of them, for a robust business plan.
Frequently asked questions
What’s the difference between breakeven and profit? Breakeven is the sales level at which revenue exactly equals total costs (fixed + variable). At breakeven, profit is zero. Profit is what you make above breakeven; loss is what you make below it.
Why is the contribution margin so important? Contribution margin determines how quickly each additional unit of sales reduces your loss or builds your profit. A higher contribution margin means each sale punches above its weight against fixed costs, lowering breakeven and accelerating profit beyond it. Low-margin businesses (retail food, fuel) have high breakeven volumes; high-margin businesses (software, consulting) have low breakeven volumes.
How do I handle multiple products with different margins? Use weighted-average contribution margin. If 70% of your sales have a 60% contribution margin and 30% have a 40% contribution margin, your weighted-average is 70% Ã, 60% + 30% Ã, 40% = 54%. Then breakeven revenue = Fixed Costs / 0.54. This works as long as the sales mix is stable; if mix changes materially you need to recalculate.
Should I aim to break even in year one? Most new businesses don’t. Year-one losses are normal — fixed costs are higher proportionally, the customer base is still being built, and prices may be promotional. The relevant question for year one is usually “are we trending towards breakeven on a believable timeline?” rather than “are we breakeven now?”.