How it's calculated
Break-even units = Fixed costs ÷ (Price − Variable cost)
Price minus variable cost is the contribution each unit makes towards fixed costs. The result is rounded up to whole units.
Assumptions
- One price and one variable cost per unit.
- Fixed costs do not change with the number of units sold.
Worked example
With fixed costs of 10,000, a price of 50 and a variable cost of 30, each unit contributes 20, so 500 units (25,000 in sales) break even.
Questions
What if the price is below the variable cost?
Then each sale loses money and there is no break-even point. Raise the price or lower the variable cost.
Why round up?
You cannot sell part of a unit, and selling one fewer would leave some fixed costs uncovered.
What counts as a fixed cost?
Costs you pay regardless of sales in the period, such as rent, salaries and insurance.