Break-even units = fixed costs ÷ contribution margin per unit, where contribution margin is the selling price minus the variable cost per unit. At that point you neither make nor lose money, and every unit you sell beyond it adds its contribution margin to profit.
Step by step
- 1
Separate fixed from variable costs
Fixed costs, such as rent, fixed salaries and subscriptions, do not change with the number of sales. Variable costs, such as materials, packaging, shipping, sales commission and payment fees, rise with every unit sold.
- 2
Work out the contribution margin
Selling price minus variable cost per unit. A product sold at 200 with a variable cost of 120 has a contribution margin of 80.
- 3
Divide fixed costs by the margin
If fixed costs are 60,000 a month, the break-even point is 60,000 ÷ 80 = 750 units a month.
- 4
Convert it into sales value
750 × 200 = 150,000 a month. You reach the same figure by dividing fixed costs by the contribution margin ratio: 60,000 ÷ 40%.
- 5
Add your target profit
To earn 20,000 a month, divide fixed costs plus that profit by the margin: 80,000 ÷ 80 = 1,000 units.
- 6
For services, use hours or contracts
Apply the same formula to an hour of work or a single contract, and compare the result with your team's real capacity.
Leaving out your own salary, or leaving sales commission, payment fees and delivery out of the variable cost per unit, gives a break-even point lower than the real one, so you think you are making money while you are losing it.
- break-even formula with example
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