To calculate a break-even point based on units:Divide fixed costs by the revenue per unit minus the variable cost per unit. The fixed costs are those that do not change no matter how many units are sold. The revenue is the price for which you’re selling the product minus the variable costs, like labor and materials.

Break-Even Point (Units) = Fixed Costs ÷ (Revenue per Unit – Variable Cost per Unit)

When determining a break-even point based on sales dollars:Divide the fixed costs by the contribution margin. The contribution margin is determined by subtracting the variable costs from the price of a product. This amount is then used to cover the fixed costs.

Break-Even Point (sales dollars) = Fixed Costs ÷ Contribution Margin

Contribution Margin = Price of Product – Variable Costs

To get a better sense of what this all means, let’s take a more detailed look at the formula components.

Fixed costs:As noted above, fixed costs are not affected by the number of items sold, such as rent paid for storefronts or production facilities, computers, and software. Fixed costs also include fees paid for services like graphic design, advertising, and public relations.

Contribution margin:The contribution margin is calculated by subtracting an item’s variable costs from the selling price. So if you’re selling a product for $100 and the cost of materials and labor is $40, then the contribution margin is $60. This $60 is then used to cover the fixed costs, and if there is any money left after that, it’s your net profit.

Contribution margin ratio:This figure, usually expressed as a percentage, is calculated by subtracting your fixed costs from your contribution margin. From there, you can determine what you need to do to break even, like cutting production costs or raising your prices.

Profit earned following your break even:Once your sales equal your fixed and variable costs, you have reached the break-even point, and the company will report a net profit or loss of $0. Any sales beyond that point contribute to your net profit.