How it’s worked out
Each sale leaves its price less its own cost (the contribution) to pay the fixed costs. When the contributions add up to the fixed costs you break even:
Contribution = price − variable cost Break-even units = fixed costs ÷ contribution (rounded up) Break-even sales = fixed costs ÷ (contribution ÷ price) Units for a profit = (fixed costs + profit) ÷ contribution
Margin of safety is how far sales can fall from what you expect before you make a loss.
Worked example
With fixed costs of 10,000, a price of 50 and a cost of 30 for each, every sale contributes 20.00. Break-even is 500 sales (25,000.00 of sales). For 5,000 profit you need 750. Expecting 700 sales gives 4,000.00 profit and a margin of safety of 28.6%. Raising the price to 55 brings break-even down to 400.
How to read the result
- Break-even: the number of sales at which you neither make nor lose money, rounded up to a whole sale.
- Each sale contributes: what’s left of each sale for fixed costs and profit, also as a share of the price.
- Margin of safety: the share your expected sales could fall by before a loss.
Common mistakes
- Putting a cost in both places: rent is fixed, materials are variable; each cost belongs in one.
- Mixing periods: fixed costs for a month give break-even sales for a month.
- Forgetting card fees, delivery or packaging in the cost of each sale.
How to use it
- Type your fixed costs for the period you’re planning.
- Type the price of one sale and what that sale costs you.
- Optionally, type a profit you want or the sales you expect.
Questions
How do I calculate my break-even point?
Divide your fixed costs by what each sale leaves after its own cost. With 10,000 of fixed costs and 20 left from each sale, you need 500 sales.
What is a contribution margin?
The price less the variable cost of each sale: what each sale contributes to fixed costs and then profit. As a share of the price it is the contribution margin ratio.
What if each sale costs more than its price?
Then nothing is left to pay the fixed costs and there is no break-even point; the calculator says so. Raise the price or cut the cost of each.
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Elsewhere on Yuzool
- Gridwork for a fuller business plan spreadsheet
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