How is the break-even point calculated?
Break-even (BE) in units is the minimum quantity you need to sell so that revenue exactly covers your total costs (fixed + variable).
The denominator is called the unit contribution margin: what each unit sold contributes to covering fixed costs.
Worked example
A coffee shop has fixed costs of $8,000/month (rent, salaries, utilities). It sells each coffee for $5. Each coffee costs $1.40 in beans, milk and a disposable cup.
Contribution margin per coffee = $5 − $1.40 = $3.60
BE = $8,000 / $3.60 ≈ 2,222 coffees/month
Selling about 2,222 coffees (≈ 74 per day) covers all costs. From coffee 2,223 onwards, every sale leaves $3.60 net.
3 common mistakes when computing break-even
1.Confusing variable cost with total cost
Variable cost is only what you spend per unit sold (inputs, commission). Salaries and rent are fixed. Mixing them makes the break-even artificially low and hides how much you actually need to sell.
2.Forgetting taxes
If price is tax-inclusive and cost is tax-exclusive, the result is inflated. Always work with figures that are consistent — either all net or all gross.
3.Assuming a constant unit margin
If you sell several products with different margins, the break-even is a weighted average. Computing it with just one product over- or under-estimates depending on the real sales mix.
Frequently asked questions
- Use the contribution margin weighted by each product's share of sales. For an MVP, you can use the main product and adjust later.