Your break-even point is the number of units you must sell for revenue to equal total costs: fixed costs divided by the profit each unit contributes (price minus variable cost). Profit margin and mark-up describe the same profit in two ways, as a share of the selling price and of the cost respectively, and they never give the same percentage.
Fixed costs, variable costs and contribution
Costs fall into two groups.
- Fixed costs do not change with the number of units sold in the period: rent, insurance, salaries, software subscriptions.
- Variable costs rise with each sale: materials, packaging, delivery, payment fees, sales commission.
The contribution per unit is the selling price minus the variable cost per unit. It is the amount each sale has left to pay towards fixed costs and then profit. The contribution margin is that figure as a percentage of the price.
The break-even formula
Break-even units = fixed costs ÷ contribution per unit
Round up to a whole unit, because 799.2 units means you need 800 sales. Multiply by the price to get break-even revenue.
Worked example, computed with the Break-even calculator tool: fixed costs of £12,000 a month, a selling price of £25 and a variable cost of £10 per unit.
| Measure | Result |
|---|---|
| Contribution per unit | £15.00 |
| Contribution margin | 60% |
| Break-even units | 800 |
| Break-even revenue | £20,000 |
Selling 800 units gives zero profit. Every unit after that adds £15.
Margin of safety and target profit
The margin of safety is how far expected sales sit above break-even. If you expect to sell 1,200 units, the margin of safety is 400 units, or 33.3% of expected sales, and profit is £6,000. If you only expect 900 units, the margin of safety falls to 100 units (11.1%) and profit to £1,500. A small margin of safety means a modest drop in sales puts you back into a loss.
For a target profit, add it to the fixed costs before dividing: (£12,000 + £6,000) ÷ £15 = 1,200 units, which is £30,000 of sales.
Costs also move prices. If the variable cost rose to £12.50 on the same price, contribution would drop to £12.50 and break-even would rise from 800 to 960 units. That is why it pays to rerun the numbers whenever a supplier changes its price.
Mark-up versus profit margin
These two are the most commonly confused terms in pricing.
- Mark-up = profit ÷ cost.
- Margin = profit ÷ selling price.
An item costing £40 and sold for £60 has a profit of £20. That is a 50% mark-up but only a 33.33% margin. Margin is always the smaller number, and it can never reach 100%, whereas a mark-up can be 200% or more.
To go from a target margin to a price, divide the cost by (1 − margin). A 25% margin on a £40 cost means a price of £53.33, which is a 33.33% mark-up. A 25% mark-up on the same cost gives a price of £50.00, which is only a 20% margin. Choosing the wrong one is a common reason for under-pricing. The Mark-up and profit margin calculator calculator converts in any direction.
VAT and margins
Work out margins on the price before VAT. VAT is collected for HMRC and is not your income. If you sell at £60 plus 20% VAT, the customer pays £72.00, of which £12.00 is VAT. Your margin is still calculated on £60. For more detail on adding and removing VAT, see VAT explained: adding and removing VAT.
Limits of break-even analysis
The model is simple on purpose, so keep its assumptions in mind.
- It assumes one product, or a stable mix of products, with a constant price and cost per unit.
- It assumes fixed costs stay fixed at every volume. In practice they can step up.
- Discounts lower the contribution per unit, so check the margin after a sale price. Percentage change, increases and discounts covers the percentage side, and How to calculate percentages is a refresher.
Note: This is general information, not financial or accounting advice. Check figures with an accountant before making business decisions.
Try the calculator
Use Break-even calculator to find break-even units, margin of safety and target-profit volume, and Mark-up and profit margin calculator to convert between cost, price, mark-up and margin.
Open the free Break-even calculator
Worked example 2: a small food stall
Break-even works for tiny businesses too. A stall owner has fixed costs of £3,000 for the period (pitch hire, insurance, equipment hire), sells each item at £4.50 and spends £1.20 on ingredients and packaging per item. The owner expects to sell 1,200 items and wants a profit of £1,000. The House of Calculator break-even calculator gives:
| Measure | Result |
|---|---|
| Contribution per item | £3.30 |
| Contribution margin | 73.3% |
| Break-even | 909.09 items, so 910 |
| Break-even revenue | £4,095.00 |
| Profit at 1,200 items | £960.00 |
| Margin of safety | 291 items (24.2% of expected sales) |
| Items for £1,000 profit | 1,213 |
| Sales for £1,000 profit | £5,458.50 |
Check by hand: £3,000 ÷ £3.30 = 909.09; round up to 910. At 1,200 items, contribution is 1,200 × £3.30 = £3,960, and subtracting £3,000 of fixed costs leaves £960. To reach £1,000 profit: (£3,000 + £1,000) ÷ £3.30 = 1,212.1, so 1,213 items.
The stall would miss the £1,000 target at its expected sales by £40, which is a useful reminder that the target and the forecast may not match.
What happens when costs rise: a sensitivity comparison
Take the original example again: £12,000 fixed costs, £25 price. See how the variable cost changes the answer.
| Variable cost per unit | Contribution | Break-even units | Break-even revenue | Profit at 1,000 units |
|---|---|---|---|---|
| £10.00 | £15.00 | 800 | £20,000 | £3,000 |
| £12.50 | £12.50 | 960 | £24,000 | £500 |
A £2.50 rise in variable cost, only 10% of the price, lifts break-even by 160 units (20%) and cuts the profit at 1,000 units from £3,000 to £500. Cost changes hit hard because they reduce the contribution on every unit. The margin of safety on 1,000 units falls to just 40 units, or 4%.
Step-by-step: building your own break-even sheet
- List every cost for one period, such as a month, and split each into fixed or variable. If a cost is mixed, such as a phone plan with usage charges, split the parts.
- Work out the price per unit before VAT.
- Add up the variable costs per unit, including payment fees and delivery.
- Subtract variable cost from price to get the contribution per unit.
- Divide the fixed costs by the contribution and round up.
- Compare the result with a realistic sales forecast, and calculate the margin of safety.
- Rerun it with a lower price, a cost rise and a lower sales forecast to see which risk matters most.
Common mistakes to avoid
- Treating all costs as fixed or all as variable. The split is the whole point of the method.
- Using the price including VAT. Use the net price, as covered in VAT explained: adding and removing VAT.
- Forgetting discounts. A 20% discount on a £25 item cuts the contribution from £15 to £10, so break-even rises from 800 to 1,200 units. See Percentage change, increases and discounts for how to work out discounted prices.
- Mixing margin and mark-up. A 50% mark-up is a 33.3% margin, so check which one a supplier or competitor is quoting.
- Ignoring your own time. If you do not pay yourself, break-even looks better than it really is.
- Not rounding up. Selling 909 items still leaves you a few pounds short.
- Using one-off costs as monthly. Spread a large purchase over the period it covers, or treat it separately.
Glossary of terms
- Break-even point: the sales volume at which total revenue equals total costs.
- Contribution: price minus variable cost per unit.
- Contribution margin: contribution as a percentage of the price.
- Margin of safety: how far expected sales exceed break-even.
- Gross margin: price minus the direct cost of sales, as a percentage of price. Exact definitions vary between businesses.
- Mark-up: profit as a percentage of cost.
- Target profit volume: the units needed to cover fixed costs and a chosen profit.
When to check with an accountant
Costs, tax treatment and VAT status can change what counts as profit. Whether you need to register for VAT, how to treat equipment purchases, and how your profit is taxed are questions for GOV.UK and an accountant, since the rules depend on your business structure. Break-even analysis is a planning tool and not a forecast.
Frequently asked questions
Is break-even measured in units or in money?
Both. Break-even units are fixed costs divided by contribution per unit, and break-even revenue is those units multiplied by the price. You can also use revenue = fixed costs ÷ contribution margin %.
How do I turn a margin into a mark-up?
Mark-up = margin ÷ (1 − margin). A 20% margin is a 25% mark-up, and a 50% margin is a 100% mark-up.
Should fixed costs include my own pay?
If you want the business to cover a wage for you, include it. If you will be paid from profit, leave it out and treat the profit as your pay.
What if my variable cost is higher than my price?
There is no break-even point, as each sale loses money before fixed costs. Raise the price or lower the variable cost.
What is the difference between gross margin and contribution margin?
Gross margin usually deducts only the direct cost of goods sold. Contribution margin deducts all variable costs, including things like delivery and card fees. The two can differ.
Can break-even be used for a service business?
Yes. Use your price per hour or per job as the price, and the cost of delivering each hour or job as the variable cost, then divide fixed costs by the contribution.
How do I work out break-even if I sell several products?
Use an average price and average variable cost, weighted by how many of each you expect to sell. It is only reliable if the sales mix stays stable.
Why is my break-even number a decimal?
Fixed costs divided by contribution rarely comes out as a whole number. Round up to the next whole unit.