How many sales cover your fixed costs

The idea in plain terms

Every business has two kinds of cost. Some costs rise with each sale: materials, packaging, a delivery fee, a payment charge, a sales commission. Others stay put whether you sell ten units or ten thousand: rent, a salary, software subscriptions, insurance, a loan instalment. The first kind is variable. The second is fixed.

Each sale contributes the gap between its price and its variable cost. That contribution first pays down the fixed costs. Until the month’s fixed costs have been covered, every sale is helping to pay for the premises and the staff. Once they are covered, the next sale’s contribution is profit.

That is why a product with a strong margin on paper can still lose money. A 36% contribution on a single sale means nothing until you have made enough sales to pay for the shop. Break-even converts the fixed costs into a number of sales you can compare with what is realistic.

The break-even calculator does the division and the revenue conversion for you, and the break-even point guide explains each input in the tool. The price that still loses money lists the costs that people forget when they price a product, and the break-even answers collect common questions.

The formulas, in the order you need them

• Contribution per unit = Selling price − Variable cost per unit.
• Break-even units = Fixed costs ÷ Contribution per unit.
• Contribution margin ratio = Contribution per unit ÷ Selling price.
• Break-even revenue = Fixed costs ÷ Contribution margin ratio. This equals break-even units times price.
• Units for a target profit = (Fixed costs + Target profit) ÷ Contribution per unit.
• Margin of safety = (Expected sales − Break-even sales) ÷ Expected sales.

Use the same period for every figure. If fixed costs are monthly, the break-even is monthly units. If you enter yearly fixed costs, the answer is a yearly count. Mixing a monthly rent with a yearly sales target is the most common source of wrong answers.

Contribution is not the same as profit margin. It uses only variable costs, so it is larger than the margin after overheads. The guide on markup and margin shows how to read the gap between price and cost, and the profit margin calculator shows both ratios for a single sale.

Six steps to find your own break-even

1. List every fixed cost for one month. Rent, salaries, loan instalments, software, insurance, a fixed share of utilities, and your own pay if you want the business to cover it.
2. Total the fixed costs. This is the number the sales must cover each month.
3. Find the variable cost of one unit. Materials, direct labour paid per piece, packaging, shipping you pay, payment processing and commission.
4. Choose a realistic selling price. Use the price customers actually pay after typical discounts, not the list price.
5. Compute contribution and divide. Enter the three numbers in the break-even calculator, or divide fixed costs by contribution yourself.
6. Compare the answer with real demand. Look at your actual monthly sales or a believable estimate. If break-even is above what you can reach, change the price, the cost or the plan.

A full example with real numbers

A small workshop sells leather wallets. Use these figures for one month.

• Selling price: 500 a wallet.
• Variable cost: leather and fittings 220, piece-rate labour 70, packaging and card fee 30. Total 320.
• Fixed costs: rent 40,000, one salaried assistant 35,000, software, power and insurance 15,000. Total 90,000.

Contribution per wallet is 500 − 320 = 180. Break-even units are 90,000 ÷ 180 = 500 wallets a month. The contribution margin ratio is 180 ÷ 500 = 36%, so break-even revenue is 90,000 ÷ 0.36 = 250,000.

That is about 17 wallets a day over 30 days, or 19 on each of 26 working days. If the shop reliably sells 400 a month, it loses money: 400 × 180 = 72,000 of contribution against 90,000 of fixed costs, a loss of 18,000. Sell 420 and the loss is 14,400. Sell 650 and the profit is 650 × 180 − 90,000 = 27,000.

The margin of safety at 650 units is (650 − 500) ÷ 650, about 23%. Sales can fall by 23% before the shop stops making a profit. A smaller number means less cushion. A business whose expected sales are only 5% above break-even is a few slow weeks from a loss.

How many sales for the profit you want

Break-even is the floor. Most owners want a return. Add the monthly profit target to fixed costs and divide again. If the workshop wants 30,000 a month after covering costs, the needed volume is (90,000 + 30,000) ÷ 180 = 667 wallets, or about 33% more than break-even.

The jump is large because every unit contributes only 180. Each extra 1,000 of target profit needs about 5.6 more units. A larger target might be out of reach at the current price. That is useful information, because it points to the levers you can pull.

The four levers and what each one does

Break-even moves when price, variable cost or fixed costs move. Test each one separately, so you can see which has the greatest effect for the effort. Use the wallet example, where the baseline is 500 units.

• Raise the price by 10%, to 550. Contribution rises to 230, and break-even falls to about 391 units, a drop of about 22%.
• Raise the price by 4%, to 520. Contribution is 200 and break-even is 450 units.
• Cut the price by 4%, to 480. Contribution is 160 and break-even rises to about 563 units.
• Cut variable cost by 10%, from 320 to 288. Contribution rises to 212 and break-even falls to about 425 units.
• Raise variable cost by 10%, to 352. Contribution falls to 148 and break-even rises to about 608 units.
• Cut fixed costs by 20%, to 72,000. Break-even falls to 400 units.
• Raise fixed costs by 20%, to 108,000. Break-even rises to 600 units.

Price changes have the strongest effect, because they change the contribution on every unit. A 10% price rise cuts break-even by 22%, while a 10% rise in variable cost raises it by about 22% too, but in the other direction. The size of the effect depends on how thin the contribution is. The thinner the contribution, the more sensitive the result is to any change in price or variable cost.

The risk with price cuts is that volume must make up for them. A 4% cut raises the required units by about 12.5%. If a price cut does not bring in at least that much extra volume, break-even is further away than before.

What discounts do to the count

Discounts act like a variable cost on every sale. Take a 10% discount on the wallet: the price falls to 450 and contribution falls to 130. Break-even jumps from 500 to about 693 units, an increase of 38%. A discount that looks small on the tag takes more than a third more sales to recover.

This is the same effect that a discount that shrinks profit describes in more detail. The discount calculator shows the price after a discount, and you can drop that price into the break-even calculator to see the new count. Before you run a sale, divide the extra units you need by the extra traffic you expect. If the numbers do not match, the discount costs more than it earns.

Selling costs that scale with price do the same job. A 2% payment fee on a 500 sale is 10, which brings contribution down to 170 and moves break-even from 500 to about 529 units. Put every cost that moves with a sale into variable cost, or the break-even will be understated.

When you sell more than one product

Most businesses sell a mix. Each product has its own price and variable cost, so a single break-even number needs a weighted average of contribution.

Suppose product A sells for 300 with a variable cost of 180, so contribution is 120. Product B sells for 800 with a variable cost of 560, so contribution is 240. Sales split 60% product A and 40% product B by units. Weighted contribution per unit is 0.6 × 120 + 0.4 × 240 = 168. With fixed costs of 90,000, break-even is 90,000 ÷ 168, about 536 units in total, which is about 321 of A and 214 of B.

The answer holds only while the mix holds. If customers move toward A, the average contribution falls. At a 80% A and 20% B split, the weighted contribution is 144 and break-even rises to 625 units. Track the mix as well as the count. If you plan a promotion on the cheaper product, test the break-even at the mix you expect from the promotion, not the old one.

Deciding what counts as fixed

Real costs are not always cleanly fixed or variable. Treat a cost as fixed only if it does not change with volume across the range you are looking at.

• Stepped costs. A second assistant may be needed once you pass 600 wallets a month. Below that volume the cost is zero, above it the cost steps up. Run a separate break-even for each step.
• Semi-variable costs. Electricity has a fixed connection charge plus a usage charge. Split it, or put the whole bill in the category that dominates.
• Loan instalments. The interest and principal are fixed, but only the interest is an accounting expense. For cash planning, treat the whole instalment as a fixed outflow.
• Your own pay. If you take a fixed draw, it belongs in fixed costs. If you leave it out, break-even looks easier than it is.
• Marketing. Monthly ad spend is fixed in the short term. If you spend more to win each customer, the customer acquisition cost calculator and what one new customer costs show how to count it.

When in doubt, lean toward a higher fixed-cost figure. Break-even built on understated costs gives a falsely comfortable answer.

The same idea for a service business

A consultant, tutor or cleaner can use the same method with hours as the unit. Suppose a tutor charges 60 an hour, has 12 an hour of variable cost for materials and travel, and fixed costs of 2,400 a month for a rented room and a booking tool. Contribution is 48 an hour, so break-even is 2,400 ÷ 48, which is 50 billable hours a month.

Compare that with available time. If the tutor can teach 25 hours a week, that is about 100 a month, and break-even uses half of capacity. If only 40 hours a month are filled, the business is below break-even even though each hour looks profitable. For a café, the same logic applies with cups sold: at a price of 4.50 and a variable cost of 1.60, a fixed cost of 11,600 a month needs 4,000 cups, or about 133 a day.

Worked example: should the workshop add a second assistant?

The wallet workshop is selling about 650 a month and has a waiting list. The owner is thinking of hiring a second assistant at 30,000 a month to raise output to 900.

Inputs

• Price 500, variable cost 320, contribution 180.
• Current fixed costs 90,000. New fixed costs with the assistant: 120,000.
• Current sales: 650 a month. Expected sales with the assistant: 800 a month.

Calculation

Step 1: current profit. 650 × 180 − 90,000 = 27,000 a month. Break-even is 500, margin of safety 23%.

Step 2: break-even with the assistant. 120,000 ÷ 180 = about 667 units. That is 167 units more than before.

Step 3: profit at 800 units with the assistant. 800 × 180 − 120,000 = 24,000. That is lower than the current 27,000.

Step 4: how many sales does the hire need to match today’s profit? (120,000 + 27,000) ÷ 180 = about 817 units. The owner needs to sell about 167 more units a month, a 26% increase, just to stay level.

Step 5: margin of safety with the assistant at 800 units: (800 − 667) ÷ 800, about 17%, down from 23%.

Result

The hire only pays if sales reach about 817 a month, and at the forecast of 800 it lowers profit by 3,000 and thins the margin of safety. A better first move may be to raise the price slightly, since a waiting list suggests demand exceeds supply. At a price of 550, contribution is 230. At 650 units, profit becomes 650 × 230 − 90,000 = 59,500, more than double, with no extra fixed cost.

What break-even does not tell you

The method is simple on purpose, and it has limits.

• It assumes a constant price and variable cost. Volume discounts from suppliers, or higher shipping at scale, change the numbers.
• It ignores timing. You can be above break-even on paper and short of cash because customers pay late or stock is bought in advance.
• It treats fixed costs as fixed forever. Over a year, rent can rise and staff can leave.
• It does not include tax. If tax is charged on sales, use a net-of-tax price. The GST calculator can strip tax from a shelf price.
• It does not tell you demand. The calculation gives a target. Whether customers will buy that many at that price is a separate question.

Use break-even as a first filter. If the answer is clearly out of reach, stop and rethink. If it looks reachable, build a cash forecast that covers timing before you commit.

Common mistakes to avoid

• Using the list price instead of the realised price. Average discounts reduce contribution.
• Leaving out variable costs that scale with price. Payment fees and commissions belong in the variable column.
• Forgetting your own pay. If the business must cover your living costs, include them.
• Mixing periods. Monthly fixed costs need a monthly sales target.
• Treating a stepped cost as fixed. A new hire or a larger premises changes the break-even.
• Assuming the product mix will not change. A promotion on a low-contribution item can raise break-even.
• Confusing break-even with profit. At break-even you earn nothing.
• Using it once and never again. Recalculate whenever price, cost or rent changes.

Checklist before you commit to a price or a cost

• List every fixed cost for one month and add them up.
• Include your own draw or salary in the fixed costs.
• List every cost that moves with each sale, including fees and commissions.
• Use the price customers actually pay after normal discounts.
• Compute contribution per unit and the contribution margin ratio.
• Divide fixed costs by contribution to get break-even units.
• Convert break-even units to revenue and to units per day.
• Compare the answer with your real sales or a cautious estimate.
• Compute the margin of safety at the sales you expect.
• Calculate the volume for the profit you want, not only for zero.
• Test a 10% price rise, a 10% discount and a 10% cost rise.
• Run the break-even again for any stepped cost, such as a new hire.
• For several products, use the weighted contribution at the mix you expect.
• Build a simple cash forecast before you act on the answer.

Frequently asked questions