Every sale first pays for itself – its materials, shipping and fees – and what is left over, the contribution margin, goes towards the costs you pay anyway: rent, wages, insurance. The break-even point is the number of sales at which those contributions add up to the fixed costs. Below it you lose money; above it, every extra sale is profit.
Example: a small bakery sells boxes of pastries at $45. Ingredients, box and card fees cost $18 a box. Rent, staff and insurance come to $12,000 a month. Each box contributes $27, so the bakery needs 445 boxes a month – about 15 a day – to break even. At 600 boxes it makes $4,200 before tax, and sales could fall 26% before it loses money.
How the price moves the break-even point
Same bakery: fixed costs $12,000 a month, variable cost $18 a box.
| Price | Contribution per box | Margin ratio | Boxes to break even | Revenue at break-even |
|---|---|---|---|---|
| $35 | $17 | 48.6% | 706 | $24,710 |
| $40 | $22 | 55.0% | 546 | $21,840 |
| $45 | $27 | 60.0% | 445 | $20,025 |
| $50 | $32 | 64.0% | 375 | $18,750 |
| $60 | $42 | 70.0% | 286 | $17,160 |
A $10 discount from $45 to $35 does not cost 22% of the margin; it costs 37% of it, so the bakery needs 59% more sales just to stand still. Small price changes have big effects when margins are thin.
And the variable cost
At $45 a box: with a variable cost of $14, break-even falls to 388 boxes; at $22, it rises to 522. Negotiating a supplier price or cheaper shipping works the same way as raising the price.
Using it well
- Prices without tax: enter prices without sales tax or VAT, which you collect for the government rather than keep. The VAT calculator takes it out.
- One period: keep fixed costs and expected sales for the same period – a month, a year, or one event (a market stall, a concert).
- Several products: use an average price and an average variable cost weighted by how much of each you sell, or work out each product line separately with its share of the fixed costs.
- Your own pay: if you run the business yourself, include the salary you need in the fixed costs; otherwise “breaking even” means working for free.
To set a price from a cost and a margin, use the markup calculator. The figures you try never leave your device, and once zet4u is saved there the calculator works offline.
Frequently asked questions
What is the break-even formula?
Break-even units = fixed costs ÷ (price per unit − variable cost per unit). The bracket is the contribution margin: what each sale leaves to pay the fixed costs. With $12,000 of fixed costs a month, a price of $45 and a variable cost of $18, each sale contributes $27, so you need 12,000 ÷ 27 = 444.4, or 445 sales a month.
How do I calculate break-even revenue?
Fixed costs ÷ the contribution margin ratio, where the ratio is the contribution margin ÷ the price. In the example, $27 ÷ $45 = 60%, so break-even revenue is $12,000 ÷ 0.60 = $20,000 (the calculator shows $20,025, for 445 whole units).
What counts as a fixed cost and what is variable?
Fixed costs stay the same whether you sell one unit or a thousand: rent, salaries, insurance, software, loan payments. Variable costs rise with every sale: materials, packaging, shipping, card fees, sales commission. Some costs are mixed (a phone plan with extra usage); split them as best you can.
What is the margin of safety?
How far sales can fall before you make a loss. If you expect to sell 600 units and break even at 445, sales can drop by 155 units, about 26%. The bigger the margin, the more room you have for a bad month.
Last checked: