In more detail
Break-even units = fixed costs / (price − variable cost per unit). The denominator is the contribution margin: what each sale contributes towards fixed costs such as rent and salaries once its own variable costs (materials, shipping, payment fees) are covered. Dividing fixed costs by the contribution margin ratio gives break-even revenue instead of units. Every unit sold above the break-even point adds its full contribution margin to profit.
Why it matters
It tells you the minimum sales a product, shop or project needs before it makes money, and how sensitive that target is to price. Leaving a cost out, or treating a fixed cost as variable, makes the target look easier than it is.
Example
Fixed costs are $3,000 a month, the price is $50 and the variable cost $30 per unit:
- Contribution margin: $50 − $30 = $20 per unit (40% of the price)
- Break-even: $3,000 / $20 = 150 units, or $3,000 / 0.40 = $7,500 of sales
- At 200 units: 50 × $20 = $1,000 profit
- Raising the price to $55 lowers break-even to $3,000 / $25 = 120 units
Common confusion
Contribution margin covers only variable costs; profit margin is what remains after all costs.