Break-Even Formulas
Break-Even Units = Fixed Costs / Contribution Margin
Break-Even Revenue = Break-Even Units × Selling Price
Margin of Safety = (Actual Sales − Break-Even Sales) / Actual Sales
Example
Product: Selling price $50, Variable cost $20, Fixed costs $9,000/month
Contribution Margin = $50 − $20 = $30 per unit
Break-Even Units = $9,000 / $30 = 300 units/month
Break-Even Revenue = 300 × $50 = $15,000/month
Fixed vs Variable Costs
| Fixed Costs | Variable Costs |
|---|---|
| Rent / lease | Raw materials |
| Salaries (salaried staff) | Hourly labor / commissions |
| Insurance | Packaging / shipping |
| Loan repayments | Payment processing fees |
| Software subscriptions | Sales tax collected |
| Depreciation | Cost of goods sold (COGS) |
Frequently Asked Questions
What is the contribution margin?
The contribution margin is the amount each unit sale contributes toward covering fixed costs and then generating profit. It equals selling price minus variable cost per unit. Once total contribution margins cover all fixed costs, every additional unit sold generates pure profit equal to the contribution margin.
What is the margin of safety?
The margin of safety shows how much sales can drop before reaching the break-even point. If you sell 500 units and break-even is 300, your margin of safety is (500−300)/500 = 40%. A higher margin of safety means more buffer against revenue downturns.
How do I find the break-even point for a service business?
For services, the "unit" is typically one hour of service, one project, or one client. Variable costs include materials and subcontractors. The formula is the same: Fixed Costs / (Service Price − Variable Cost per Service). For example, a consultant charging $150/hr with $30 variable costs and $6,000 monthly fixed costs breaks even at 50 billable hours/month.
What if I have multiple products?
For multiple products, calculate a weighted average contribution margin based on your expected sales mix. Break-Even Units = Fixed Costs / Weighted Avg Contribution Margin. The resulting units are then allocated to each product based on the sales mix percentages.