How break-even works
Each sale contributes its price minus its variable cost toward your fixed costs. That contribution margin is the key number: sell a $50 product that costs $20 to make and deliver, and every unit contributes $30. With $12,000 of fixed costs, you cover them after $12,000 ÷ $30 = 400 units, or $20,000 of revenue. Every unit after that adds $30 of profit, so a $6,000 profit target needs 600 units.
- Break-even units = fixed costs ÷ (price − variable cost)
- Break-even revenue = break-even units × price, or fixed costs ÷ contribution margin ratio
- Units for a target profit = (fixed costs + target) ÷ (price − variable cost)
Using it to make decisions
The formula shows which lever moves the break-even most. Raising the price from $50 to $55 lifts the contribution from $30 to $35 and cuts the break-even from 400 to 343 units. It also tells you how many extra sales a new fixed cost — a hire, a lease — has to bring in to pay for itself: divide it by your contribution per unit.
If you sell more than one product, use a weighted average price and variable cost based on your sales mix. To check the margin on your price, use the markup calculator.