The idea behind break-even
Every unit you sell brings in its price and costs you its variable cost, such as materials, packaging, delivery and payment fees. The difference, the contribution margin, first pays off the fixed costs of running the business. Once enough contribution has been collected to cover rent, salaries and other fixed costs, every further sale is profit.
Formulas used
- Contribution per unit = price − variable cost
- Contribution margin ratio = contribution ÷ price
- Break-even units = fixed costs ÷ contribution per unit
- Break-even revenue = fixed costs ÷ contribution margin ratio
- Units for a target profit = (fixed costs + target profit) ÷ contribution per unit
Example: a small bakery
| Item | Monthly figure |
|---|---|
| Fixed costs (rent, two staff, electricity base, software) | ₹1,20,000 |
| Average price per cake | ₹600 |
| Variable cost per cake | ₹360 |
| Contribution per cake | ₹240 (40%) |
| Break-even | 500 cakes, ₹3,00,000 of sales |
| To earn ₹60,000 profit | 750 cakes |
Using the answer
Divide the break-even units by the number of trading days to get a daily target the team can track. Test scenarios: a 10% price increase often lowers break-even more than a 10% cut in fixed costs. Keep an eye on your margin of safety, the gap between expected sales and break-even sales.
Read the complete break-even point guide, set prices with the profit margin calculator, and work out how many leads you need with the conversion rate calculator.
Frequently asked questions
What is the break-even formula?
Break-even units = fixed costs ÷ (selling price per unit − variable cost per unit). Break-even revenue = break-even units × price, or fixed costs ÷ contribution margin ratio.
What counts as a fixed cost?
Costs that do not change with sales volume in the short term: rent, salaries, software subscriptions, loan EMIs, insurance and depreciation.
What is contribution margin?
The amount each sale contributes towards fixed costs and profit: selling price minus variable cost per unit.
What if price is lower than variable cost?
Then there is no break-even point. Every extra sale increases the loss, so you must raise the price or cut variable cost.
Can service businesses use break-even?
Yes. Treat a billable hour, a project or a subscriber as the unit and use the direct cost of delivering it as the variable cost.
