How to Calculate Monthly Break Even Point

The monthly break even point is the point at which your total revenue equals your total costs for a specific month. Understanding this concept helps businesses determine how many units they need to sell to cover all expenses and start making a profit.

What is a Break Even Point?

The break even point is a financial metric that shows the level of sales or production needed to cover all costs and generate zero profit. For monthly calculations, it represents the point where your total monthly revenue equals your total monthly costs.

Knowing your break even point helps businesses make informed decisions about pricing, production levels, and sales targets. It's particularly useful for startups, small businesses, and entrepreneurs evaluating their financial health.

Break Even Formula

The basic break even formula is:

Break Even Point = Fixed Costs / (Selling Price per Unit - Variable Cost per Unit)

For monthly calculations, you'll need to adjust this formula to account for monthly expenses and revenue. The monthly break even point can be calculated using:

Monthly Break Even Point = Monthly Fixed Costs / (Monthly Revenue per Unit - Monthly Variable Cost per Unit)

Where:

Monthly Fixed Costs are expenses that don't change with production or sales volume (rent, salaries, insurance)
Monthly Revenue per Unit is the amount earned from selling one unit
Monthly Variable Cost per Unit are costs that vary with production or sales (materials, labor, packaging)

How to Calculate Monthly Break Even

To calculate your monthly break even point:

Determine your total monthly fixed costs
Calculate your monthly revenue per unit
Determine your monthly variable cost per unit
Subtract the variable cost from the revenue per unit to get the contribution margin per unit
Divide the total fixed costs by the contribution margin per unit to get the break even point in units

Note: The break even point in units must be converted to a monthly figure by multiplying by the number of units sold per month.

Worked Example

Let's calculate the monthly break even point for a small business:

Item	Amount
Monthly Fixed Costs	$5,000
Monthly Revenue per Unit	$100
Monthly Variable Cost per Unit	$60

Step 1: Calculate contribution margin per unit

$100 (Revenue) - $60 (Variable Cost) = $40 Contribution Margin per Unit

Step 2: Calculate break even point in units

$5,000 (Fixed Costs) / $40 (Contribution Margin) = 125 Units

This means the business needs to sell 125 units per month to break even.

Interpreting Results

The break even point calculation provides several key insights:

Profitability Threshold: Shows the minimum sales needed to cover costs
Cost Control: Helps identify areas where costs can be reduced
Pricing Strategy: Guides decisions about product pricing
Production Planning: Assists in setting production targets

Businesses should regularly review their break even point as market conditions, costs, and revenue streams change.

FAQ

What is the difference between fixed and variable costs in break even calculation?: Fixed costs remain constant regardless of production volume (rent, salaries), while variable costs change with production (materials, labor). The break even formula accounts for both to determine the point where revenue covers all costs.
How does the break even point change with pricing?: Higher selling prices increase the contribution margin per unit, which lowers the break even point in units. Conversely, lower prices reduce the contribution margin, raising the break even point.
Can the break even point be negative?: Yes, if your variable costs exceed your selling price, the break even point becomes negative, meaning you would need to sell a negative number of units to break even - which is impossible. This indicates a need to increase prices or reduce costs.
How often should businesses review their break even point?: Businesses should review their break even point at least quarterly, or whenever there are significant changes in costs, prices, or market conditions. This helps maintain financial health and adapt to changing circumstances.