Break-Even Analysis: Where Two Straight Lines Decide Your Profit

Two lines, one crossing point

Every break-even chart is built from exactly two straight lines. Total revenue is price × units sold — a line through the origin, since zero units sold means zero revenue. Total cost is fixed costs + variable cost per unit × units — a line that starts above zero (at the fixed-cost level) and climbs at the rate of the variable cost per unit. Where the two lines cross is the break-even point.

Total Revenue = price × units
Total Cost    = fixed_costs + variable_cost_per_unit × units
Break-even units = fixed_costs / (price − variable_cost_per_unit)

Contribution margin: the engine of the whole model

The denominator in that break-even formula, price − variable cost per unit, is called the contribution margin — the amount each additional unit sold contributes toward covering fixed costs before any profit exists. Divide fixed costs by contribution margin and you get exactly how many units must be sold before revenue catches up with total cost. Every unit sold past that point has its contribution margin flow straight to profit, since fixed costs are already covered.

Fixed costs, variable costs, and the shapes they create

Fixed costs — rent, salaried staff, insurance, depreciation — don't move with output; they're incurred whether the business sells zero units or ten thousand. Variable costs — raw materials, hourly production labour, shipping per unit, sales commissions — scale directly with volume. In reality, economies of scale can bend the variable-cost line down at higher volumes (bulk purchasing, spread-out overhead), while capacity constraints can bend it back up; the straight-line assumption used here holds well over a limited output range, which is exactly why it's the standard introductory break-even model.

Margin of safety and multi-product complications

Margin of safety = (units sold − break-even units) ÷ units sold, expressed as a percentage, measures the buffer between current sales and the break-even point — a 40% margin of safety means sales could drop 40% before the business slips back to break-even. Real businesses selling multiple products at different margins need a weighted-average break-even point, since the sales mix — the proportion of each product actually sold — directly shifts overall profitability; a change in mix toward lower-margin products can push a profitable-looking business back toward break-even even with total revenue unchanged.

One edge case is worth knowing: if variable cost per unit ever equals or exceeds price, the contribution margin is zero or negative, and no volume of sales can ever break even — every additional unit sold either adds nothing toward fixed costs or actively deepens the loss.

Frequently asked questions

Try it live

Everything above runs in your browser — open Break-Even Analysis and change the parameters while it is running. Nothing is installed, nothing is uploaded, the whole model lives in one tab.