Break-Even
How many sales cover the fixed costs, and how much room you have above that.
In your head, jot if needed · no calculator why?
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the idea
Break-even is where total contribution exactly covers the fixed costs: no profit, no loss. Break-even units are the fixed costs ÷ the contribution per unit, rounded up, since one unit fewer still leaves a loss.
In sales dollars, divide the fixed costs by the contribution margin ratio. The margin of safety is how far sales could fall before break-even, as a share of current sales: with 40 customers and break-even at 30, it is 10 out of 40, or 25%.
techniques
Fixed costs ÷ contribution
- Find the contribution per unit: price minus variable cost.
- Divide the fixed costs by it.
- Round up to a whole unit, even for a small remainder.
worked example
A product sells for $60 and has $35 of variable cost per unit. Fixed costs are $2,030 a month. How many whole units must it sell each month to break even?
- Contribution: $60 − $35 = $25 a unit.
- $2,030 ÷ $25 = 81.2.
- Round up: 81 units would leave $5 uncovered.
Answer: 82
Break-even in sales dollars
- Write the ratio as a decimal: 40% is 0.4.
- Divide the fixed costs by it.
- Check: the ratio times your answer gives back the fixed costs.
worked example
Fixed costs are $9,000 a month and the contribution margin ratio is 40%. What monthly sales revenue breaks even?
- $9,000 ÷ 0.4 = $22,500.
- Check: 40% of $22,500 is $9,000.
Answer: $22,500
Bundle the sales mix
- Make one bundle in the stated mix, like 3 coffees and 1 sandwich.
- Add up the bundle's contribution, and divide the fixed costs by it.
- Multiply the bundles by the items in each bundle.
worked example
A food truck sells 2 tacos for every 1 drink. Each taco contributes $3 and each drink $2. Fixed costs are $4,000 a month. How many total items must it sell to break even if the mix holds?
- One bundle: 2 × $3 + 1 × $2 = $8 for 3 items.
- $4,000 ÷ $8 = 500 bundles.
- 500 × 3 = 1,500 items.
Answer: 1,500
watch out for
- Rounding break-even down. 81.2 units means 82, because at 81 the business is still short.
- Dividing the fixed costs by the price. Part of the price pays the variable costs, so divide by the contribution.
- Averaging two contributions without weighting them by the mix.
- Dividing the margin of safety by break-even instead of by current sales.
practice
Break-even units
worked example
Fixed costs are $15,100 a month and each service contributes $385. How many whole services are needed to break even?
Answer: 40
- Break-even = fixed ÷ contribution = $15,100 ÷ $385 ≈ 39.22; round up to 40.
- At 39, contribution is $15,015, $85 short of fixed costs.
Break-even from price and cost
worked example
A product sells for $365 and has $215 of variable cost per unit. Fixed costs are $9,070 a month. How many whole units must it sell each month to break even?
Answer: 61
- Contribution = $365 − $215 = $150 per unit.
- Break-even = $9,070 ÷ $150 ≈ 60.47; round up to 61 units.
Break-even sales dollars
worked example
Fixed costs are $38,500 a month and the contribution margin ratio is 25%. What monthly sales revenue breaks even?
Answer: $154,000.00
- Each sales dollar contributes $0.25, so revenue needed = $38,500 ÷ 0.25 = $154,000.
- Check: 25% of $154,000 is $38,500.
Margin of safety
worked example
A business has 200 customers and breaks even at 116 customers. What percentage of its current customers could it lose before it reaches break-even?
Answer: 42%
- Headroom ÷ current = (200 − 116) ÷ 200 = 84 ÷ 200 = 42%.
- Divide by current sales, not by the break-even point.
Break-even with a sales mix
worked example
A bakery sells 3 loaves of bread for every 4 cakes. Each loaf of bread contributes $9 and each cake $2. Fixed costs are $10,500 a month. How many total items must it sell to break even if the mix holds?
Answer: 2,100
- Group the mix into a bundle: 3 × $9 + 4 × $2 = $35 per 7 items.
- $10,500 ÷ $35 = 300 bundles = 300 × 7 = 2,100 items.