The break-even formula
Break-even units = fixed costs ÷ (price − variable cost per unit)
The part in brackets is the contribution margin per unit: what each sale leaves over after its own variable costs, such as materials, packaging and shipping. That money first pays for the fixed costs, like rent, salaries and insurance, which stay the same whatever you sell. Once the fixed costs are covered, every further unit adds its full contribution margin to profit.
In revenue terms: break-even revenue = fixed costs ÷ contribution margin ratio, where the ratio is contribution margin ÷ price.
Working through the example
A bag of coffee sells for $18.00. Beans, packaging and shipping cost $7.20 per bag, so each bag contributes $10.80, a contribution margin ratio of 60%. Fixed costs are $12,960 a month. Break-even is $12,960 ÷ $10.80 = 1,200 bags, or $21,600 of revenue. The check in the last row multiplies the break-even volume by the contribution margin and subtracts the fixed costs. The result must be exactly zero.
Worked example: break-even for a coffee roaster
Six inputs in yellow. Every result is a formula, so you can change the price or the costs and see the break-even point move.
| A | B | Formula in B | |
|---|---|---|---|
| 1 | Coffee roaster, per month | Value | |
| 2 | Selling price per bag ($) | 18.00 | |
| 3 | Variable cost per bag ($) | 7.20 | |
| 4 | Fixed costs per month ($) | 12,960.00 | |
| 5 | Budgeted sales (bags) | 1,500 | |
| 6 | Target profit after tax ($) | 4,500.00 | |
| 7 | Tax rate | 25% | |
| 8 | Contribution margin per bag | 10.80 | =B2-B3 |
| 9 | Contribution margin ratio | 60.0% | =B8/B2 |
| 10 | Break-even point (bags) | 1,200 | =B4/B8 |
| 11 | Break-even revenue ($) | 21,600.00 | =B4/B9 |
| 12 | Margin of safety (bags) | 300 | =B5-B10 |
| 13 | Margin of safety (% of budget) | 20.0% | =B12/B5 |
| 14 | Pre-tax profit needed | 6,000.00 | =B6/(1-B7) |
| 15 | Bags needed for the target profit | 1,756 | =ROUNDUP((B4+B14)/B8,0) |
| 16 | Check: profit at break-even | 0.00 | =B10*B8-B4 |
Margin of safety
The budget is 1,500 bags a month. The margin of safety is the distance between budgeted sales and break-even: 1,500 − 1,200 = 300 bags, or 20% of budgeted sales. Sales could fall by a fifth before the business makes a loss. At budget, profit is 300 × $10.80 = $3,240 a month, because every bag above break-even adds its full contribution margin. A small margin of safety is a warning sign, especially in a business with high fixed costs.
Operating leverage: why profit swings faster than sales
At budget, total contribution is $16,200 and profit is $3,240. The ratio of the two, the degree of operating leverage, is 5.0. It means a 10% rise in sales lifts profit by about 50%, and a 10% fall cuts it by the same. The closer a business operates to its break-even point, the higher this number and the more sensitive profit becomes. It is the margin of safety seen from the other side: 5.0 is exactly 1 ÷ 20%.
Volume for a target profit
Treat the target profit like an extra fixed cost: units = (fixed costs + target profit) ÷ contribution margin. The owner wants $4,500 a month after tax. At a 25% tax rate, that needs $4,500 ÷ (1 − 25%) = $6,000 before tax. So ($12,960 + $6,000) ÷ $10.80 = 1,755.56 bags. You cannot sell part of a bag, and rounding down would miss the target, so round up with ROUNDUP(…,0): 1,756 bags.
Break-even chart and Goal Seek
For a chart, make a small table with volumes in steps (0, 250, 500 … 2,000 bags) and three columns: revenue =A20*$B$2, total cost =$B$4+A20*$B$3 and profit =B20-C20. Plot revenue and total cost as lines. They cross at the break-even point, and the gap between them shows profit or loss at every volume.
Excel's Goal Seek (Data › What-If Analysis) does the same calculation backwards: set the profit cell to 0 by changing the volume. It is handy when the cost structure is more complex than one formula, for example with stepped fixed costs.
More than one product
With several products, use a weighted average contribution margin based on the expected sales mix. If the mix changes, the break-even point changes too, even when prices and costs stay the same. Selling more of a low-margin product raises the break-even volume.
Common mistakes
- Dividing fixed costs by the price instead of the contribution margin. Each sale only contributes what is left after its variable costs.
- Putting semi-variable costs in the wrong group. Split mixed costs, such as a phone contract with a base fee plus usage, into their fixed and variable parts.
- Rounding the target volume down. Break-even and target volumes are minimums, so round up.
- Forgetting tax on an after-tax target. Gross it up first: pre-tax profit = after-tax profit ÷ (1 − tax rate).
- Assuming costs and prices stay fixed at any volume. Break-even analysis holds only within a normal operating range. A second shift or a bulk discount changes the numbers.
Frequently asked questions
What is the formula for break-even in Excel?
With fixed costs in B4, the price in B2 and the variable cost per unit in B3, break-even units are =B4/(B2-B3). Break-even revenue is that volume times the price, or fixed costs divided by the contribution margin ratio.
What is the difference between break-even point and margin of safety?
The break-even point is the volume at which profit is zero. The margin of safety is how far budgeted or actual sales are above that point, in units, dollars or as a percentage.
Can I use Goal Seek for break-even analysis?
Yes. Build a profit formula that depends on the volume, then use Data › What-If Analysis › Goal Seek to set the profit to 0 by changing the volume cell.
How do I calculate break-even for several products?
Use the weighted average contribution margin per unit, based on the expected sales mix. The result is a total number of units, which you split back into products by the same mix.