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Breakeven Point

The breakeven point is the level of sales or output at which total revenue equals total costs, so a business makes neither a profit nor a loss.

What Is a Breakeven Point?

A breakeven point is the level of activity at which a business's revenue exactly covers its costs. At that level, the company earns no profit and suffers no loss. Sales above the breakeven point generally contribute to profit, while sales below it result in a loss.

Managers use breakeven analysis to plan pricing, production levels, and budgets. Investors can use the same idea to judge how far sales could fall before a company starts losing money.

How It Is Calculated

The most common version divides fixed costs by the contribution margin per unit:

Breakeven Units = Fixed Costs / (Price per Unit − Variable Cost per Unit)

Fixed costs are expenses that stay the same regardless of output, such as rent and salaries. Variable costs rise and fall with each unit produced, such as raw materials and shipping. The difference between the selling price and the variable cost per unit is the amount each sale contributes toward covering fixed costs.

Example

Suppose a small bakery has $10,000 of monthly fixed costs, sells each cake for $20, and spends $12 per cake on ingredients and packaging. Each cake contributes $8 toward fixed costs, so the breakeven point is $10,000 divided by $8, or 1,250 cakes per month. Selling 1,250 cakes produces $25,000 of revenue, which exactly matches $10,000 of fixed costs plus $15,000 of variable costs. Selling 1,300 cakes would add $400 of profit.

Limits and Why It Matters

Breakeven analysis relies on simplifying assumptions. It assumes prices and per-unit costs stay constant and that the company sells everything it produces, which real businesses rarely experience exactly. Companies with high fixed costs, such as airlines or manufacturers with large factories, usually have higher breakeven points, which makes their profits more sensitive to changes in sales. This sensitivity is closely related to operating leverage.

For investors, the breakeven level offers a rough sense of a company's margin for error. A business that breaks even at a low sales volume has more room for sales to decline before losses appear. The concept is a planning tool rather than a forecast, so it works best alongside the company's other financial statements.

Updated October 22, 2026. For general education only; not financial, tax or legal advice.

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Related Terms

Revenue

Revenue is the total money a company earns from its core business activities, such as selling goods or services, before any expenses are subtracted.

Fixed Cost

A fixed cost is a business expense that stays the same in total over a given period regardless of how much a company produces or sells within a normal range of activity.

Contribution Margin

Contribution margin is the portion of a sale's revenue left after subtracting variable costs, showing how much each sale contributes toward covering fixed costs and generating profit.

Variable Cost

A variable cost is a business expense that rises or falls in direct proportion to the quantity of goods or services a company produces or sells.

Operating Leverage

Operating leverage measures how much a company's operating income changes in response to a change in its sales, driven by the mix of fixed and variable costs in its cost structure.

Margin of Safety

A margin of safety is the gap between an asset's estimated intrinsic value and its market price, used by value investors as a cushion against errors in analysis or unexpected setbacks.

Profit Margin

Profit margin is a percentage showing how much of a company's revenue remains as profit after certain costs are subtracted, indicating how efficiently the business turns sales into earnings.

Gross Margin

Gross margin is the percentage of a company's revenue that remains after subtracting the direct costs of producing the goods or services it sells, showing how much each sales dollar contributes.