What is the break-even point?
Published
The break-even point is the sales level at which a business covers all costs without making a profit or loss. Sales above it create profit, while sales below it create loss. It is used in pricing, product decisions, branch planning, and new service launches.
The examples on this page use a fictional business (Al Waha Office Supplies). Figures are illustrative only and are not real business data or sector benchmarks.
Short answer
The break-even point is the sales level where profit is zero. It is not the final target, but it tells you whether price, sales volume, and fixed costs can produce a sustainable business.
Formulas
Contribution margin per unit = Selling price - Variable cost per unitBreak-even units = Fixed costs ÷ Contribution margin per unitBreak-even sales = Break-even units × Selling price
Worked example
A product sells for SAR 100. Variable cost is SAR 60. Monthly fixed costs are SAR 40,000.
Contribution margin = 100 - 60 = SAR 40Break-even units = 40,000 ÷ 40 = 1,000 unitsRequired sales = 1,000 × 100 = SAR 100,000
If the business sells 1,200 units, contribution after break-even is 200 × 40 = SAR 8,000.
Common mistakes
| Mistake | Effect |
|---|---|
| Using gross profit instead of contribution margin | Inaccurate result when variable costs differ |
| Leaving salaries and rent out of fixed costs | An artificially low break-even point |
| Calculating break-even only once | Price and cost changes are not reflected |
When to recalculate break-even
| Event | Reason |
|---|---|
| Selling price changes | Contribution margin changes immediately |
| Rent or salaries increase | Fixed costs rise |
| Supplier cost changes | Variable cost changes |
| New product launch | Needs its own break-even point |
Example 2: effect of a price increase
In the earlier example, if price rises from SAR 100 to SAR 110 while variable cost stays SAR 60, contribution margin becomes SAR 50. New break-even units = 40,000 ÷ 50 = 800 units. The price increase reduces required volume, but it may affect demand.
Reading the result
| Result | Meaning |
|---|---|
| Break-even above realistic sales capacity | Price, cost, or market size may not work |
| Break-even close to current sales | Margin of safety is weak |
| Break-even far below current sales | The activity has stronger profit room |
Link to reports
A strong break-even page does not stop at the formula. Link it to income statement, gross profit, fixed costs, and variable costs so the user knows where the inputs come from.
Frequently asked questions
Is break-even profit?
No. It is the point of no profit and no loss before items not included in the model.
Does break-even work for services?
Yes, if you can estimate the service price, variable cost, and fixed operating costs.
Does VAT enter the calculation?
Usually no, if VAT is collected and deducted normally rather than kept as revenue or borne as cost.