The break-even point is the point at which total cost and total revenue are equal. It is the moment when a business stops losing money and starts making it. Sell one more unit, and you profit. Sell one less, and you lose.

Calculating it requires two numbers: fixed costs and contribution margin. Fixed costs do not change with volume—rent, salaries, insurance. Contribution margin is the price of one unit minus its variable cost. Divide fixed costs by contribution margin, and you get the number of units needed to break even. A bakery with $5,000 in monthly fixed costs and a $2 contribution margin per loaf needs to sell 2,500 loaves to break even. The concept is simple but powerful. It tells you how much you need to sell, how low you can price, and how much risk you are taking. It is used for pricing decisions, budgeting, and investment analysis. Every business owner should know their break-even point.

Key terms

• Fixed costs: do not change with volume
• Variable costs: change with volume
• Contribution margin: price minus variable cost
• Formula: fixed costs / contribution margin