What Is the Break-Even Point?
Formula, margin of safety, and a worked example.
Home › Accounting Glossary › Break-Even Point
| In sales value | Fixed costs ÷ Contribution margin ratio |
|---|---|
| Related | Fixed cost · Variable cost · Contribution margin |
| Topic | Cost accounting · CVP analysis |
Break-even point in plain English
Each unit you sell contributes something toward paying the fixed costs. The break-even point is how many units you must sell before all the fixed costs are covered. Every unit after that adds to profit.
Worked example
Fixed costs are 20,000. The selling price is 50 per unit and the variable cost is 30 per unit.
Contribution per unit = 50 − 30 = 20.
Break-even units = 20,000 ÷ 20 = 1,000 units, which is 1,000 × 50 = 50,000 in sales.
Margin of safety: if expected sales are 1,400 units, the margin of safety is (1,400 − 1,000) ÷ 1,400 = 28.6%. Sales can fall by that much before the business starts making a loss.
- Assuming price and costs stay the same at every volume.
- Forgetting that a change in sales mix changes the break-even point for multi-product businesses.
Frequently asked questions
How do you calculate the break-even point in sales value?
Divide fixed costs by the contribution margin ratio. In the example, 20,000 ÷ 0.40 = 50,000.
What is the margin of safety?
The amount by which actual or expected sales exceed break-even sales, often shown as a percentage.
How can a business lower its break-even point?
Reduce fixed costs, cut variable costs per unit, or raise the selling price.
Keep learning
This page is for general learning. Accounting rules vary by country and standard.