Accounting · Foundations

Break-Even Analysis

On this page 9 sections

In 30 seconds
Why this matters
The college version
Eli explains
Worked example
Key takeaway
Quick check
Study tools
Sources & references

In 30 seconds

Break-even is the point where revenue covers all costs — no profit, no loss. The working definition adopted here comes from OpenStax's Principles of Accounting, Volume 2. The one formula: = ÷ (price − variable cost per unit). Price minus variable cost per unit is the — what each sale contributes. Break-even matters for pricing, planning, and risk. It is a planning tool, not a promise.

Why this matters

Every business faces the same question: how much must we sell before the money turns even? answers it with one division. Owners use it to set prices — the price must leave enough per sale to cover fixed costs. Managers use it to plan — it turns a vague sales hope into a concrete target, like 225 burritos a month. Lenders and investors read it as a risk gauge: the lower the , the smaller the sales fall a business can survive. OpenStax is blunt about the stakes — no business can operate very long below break-even. It is one of the first numbers a new venture should know.

The college version

What the break-even point is

OpenStax's Principles of Accounting, Volume 2 defines the break-even point as the dollar amount or production level at which the company has recovered all variable and fixed costs — the point where total cost equals total revenue. CFI calls it the no-profit, no-loss point. Sell exactly that much, and every cost is covered with nothing left over; sell one unit less, and the business is in the red; sell one unit more, and profit begins. OpenStax notes the concept applies to every kind of business — manufacturing, retail, and service — which is why it is one of the first numbers owners and managers calculate. The name is a promise about what happens at that exact point: money in equals money out, so the books neither gain nor lose.

The one formula and contribution margin

This lesson teaches a single formula: break-even units = fixed costs ÷ (price − variable cost per unit). Each piece has a job. Fixed costs stay the same in total — rent, permits, insurance. Price is what one unit sells for. Variable cost per unit is what one unit costs to make or buy. The bottom of the formula has its own name: price minus variable cost per unit is the contribution margin, which CFI defines as the amount each sale contributes toward covering fixed costs. OpenStax explains the logic: with zero sales, the business loses exactly its fixed costs, and every sale shrinks that loss by the contribution margin until break-even is reached. After that, each sale adds the same amount to profit. Notice that the denominator is a difference, not a sum: the formula divides fixed costs by what is left of each sale after its own , not by the full price.

Worked example: Marisol's food cart

Marisol runs Curbside Kitchen, a food cart selling burritos. Her fixed costs are $900 a month: $350 for the cart permit, $300 for insurance, and $250 for a storage locker. She sells each burrito for $10, and her variable costs are $6 per burrito — ingredients, packaging, and fuel for the warmer. Contribution margin: $10 − $6 = $4 per burrito. Break-even units: $900 ÷ $4 = 225 burritos a month. The check: 225 burritos × $10 = $2,250 in revenue, and $900 fixed + 225 × $6 = $1,350 variable = $2,250 in total costs. Revenue equals cost — no profit, no loss. Burrito 226 earns her first $4 of profit. The same break-even in revenue, one line: fixed costs ÷ = $900 ÷ 0.40 = $2,250 in sales. If she sells only 200 burritos, she collects $2,000 but owes $2,100 in costs — a $100 loss, exactly 25 burritos short of break-even.

Why it matters: pricing, planning, and risk

Three uses carry the weight, one line each. Pricing: the calculation shows whether a price leaves enough per sale to cover fixed costs — if Marisol priced burritos at $7, the contribution margin would drop to $1 and break-even would climb to 900 burritos, an unrealistic target. Planning: the break-even number becomes the sales goal, and CFI notes the company then knows what sales target it needs to set to generate profit. Risk: it measures how far sales can fall before losses begin, and OpenStax warns that no business can operate very long below break-even.

The limits and the honest framing

The formula is only as good as its assumptions. OpenStax lists them: the selling price per unit stays constant, variable cost per unit stays constant, fixed costs stay fixed in total, all units produced are sold, and the sales mix holds. Real businesses break these assumptions all the time — a bulk discount cuts the price, a supplier raises ingredient costs, a rent increase raises fixed costs. So the honest framing: break-even analysis is a planning tool, not a promise. It gives a minimum target and a risk gauge, calculated from today's numbers. When prices or costs change, the answer changes with them, and the calculation simply runs again. The same logic explains why break-even is quoted per period — a month, a quarter, a season — because fixed costs are charged per period, and the answer holds only for the period it was computed for.

Eli explains

The same idea, in plain words

Explain it like I’m 10

Break-even is the moment a business's sales exactly cover its costs — no profit, no loss. It is the answer to one question: how much must I sell before the money turns even? You find it by dividing fixed costs by the contribution margin — the amount each sale chips in after paying for its own variable costs. Sell less, and you lose money; sell more, and the extra sales become profit.

Picture it like this

Picture the cart's fixed costs as a big empty hole in the ground. Every burrito sold is a shovel of dirt worth $4 — the contribution margin. Before the hole is full, you are still in the red. Break-even is the moment the last shovel brings the pile level with the ground. Every burrito after that is dirt piled above the ground — profit you get to keep.

Where the picture stops working

In real life the hole is not a fixed size: prices change, ingredient costs jump, and rent goes up, so the break-even point moves. The analogy also suggests the hole stays filled once it is level, but next month's fixed costs open a new hole — so break-even must be recalculated for every period.

Worked example

Marisol runs Curbside Kitchen, a food cart that sells burritos. Her fixed costs are $900 a month: $350 for the cart permit, $300 for insurance, and $250 for a storage locker. She sells each burrito for $10. Variable costs come to $6 per burrito — ingredients, packaging, and fuel for the cart's warmer. Contribution margin: $10 − $6 = $4 per burrito. Break-even: $900 ÷ $4 = 225 burritos a month. The check: 225 burritos × $10 = $2,250 in revenue; $900 fixed + 225 × $6 = $1,350 variable = $2,250 in total costs. Revenue equals cost exactly. The 226th burrito earns her first $4 of profit. In sales dollars, the same point is $900 ÷ 0.40 = $2,250.

Key takeaway

Break-even is the point where revenue covers all costs — no profit, no loss — found by dividing fixed costs by the contribution margin per unit. It sets the minimum sales target and gauges risk, but because it assumes constant prices and costs, it is a planning tool, not a promise.

Quick check

3 questions here, of 5 in this lesson’s practice set. Answers stay hidden until you check.

Question 1 of 3foundational

At the break-even point, which of the following is true?

Choose an answer, then check it.

Question 2 of 3intermediate

Marisol's food cart has fixed costs of $900 a month, sells burritos at $10 each, and has variable costs of $6 per burrito. How many burritos must she sell in a month to break even?

Choose an answer, then check it.

Question 3 of 3intermediate

In a month when Marisol sells 300 burritos, her contribution margin is $4 per burrito and her fixed costs are $900. What is her profit that month?

Choose an answer, then check it.

Practice all 5

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Practice this lesson

Study tools & related lessonsYou’ll learn to · Common mistakes · Easily confused · Key vocabulary · Related

You’ll learn to

Define the break-even point with the working definition from OpenStax's Principles of Accounting, Volume 2: the point where revenue covers all costs — no profit, no loss.
State THE formula: break-even units = fixed costs ÷ (price − variable cost per unit).
Define contribution margin as price minus variable cost per unit — the amount each sale contributes toward covering fixed costs.
Apply the formula in an original worked example: a food cart's fixed costs, price, and variable cost per unit.
Explain why break-even matters — pricing, planning, and risk, one line each — and name the sales-dollar version.
State the honest framing: break-even assumes constant prices and costs, so it is a planning tool, not a promise.

Common mistakes

Forgetting the fixed costs exist before the first sale
Putting the wrong numbers in the denominator
Calling contribution margin profit
Treating the answer as permanent

Easily confused

Break-even in units vs. Break-even in dollars

Break-even in units is fixed costs ÷ (price − variable cost per unit), a count of units; break-even in dollars is fixed costs ÷ contribution margin ratio, the same point expressed as sales revenue.

Fixed costs vs. Variable costs

Fixed costs stay the same in total, like rent and permits; variable costs move with each unit, like ingredients. Both sit in the formula — fixed on top, variable inside the bottom.

Below break-even vs. Above break-even

Below break-even, every sale only shrinks the loss by the contribution margin; above break-even, every sale adds the same amount to profit.