Break-even is where total revenue equals total cost, and it rests on one intermediate figure that matters more than the answer itself — contribution margin, the amount each sale contributes toward covering fixed costs.
contribution margin = price − variable cost per unitbreak-even units = fixed costs ÷ contribution marginbreak-even revenue = fixed costs ÷ (contribution margin ÷ price)
The distinction that trips people up is which costs are which. Fixed costs do not move with volume: rent, salaried wages, insurance, software subscriptions. Variable costs occur only because a unit was sold: materials, packaging, payment-processing fees, per-order shipping.
A small coffee shop:
| Item | Amount |
|---|---|
| Rent | 3,200 / month |
| Wages (salaried) | 2,400 / month |
| Insurance, software, utilities | 900 / month |
| Fixed costs | 6,500 / month |
| Selling price per cup | 4.20 |
| Variable cost per cup (beans, milk, cup, card fee) | 1.35 |
| Step | Calculation | Result |
|---|---|---|
| Contribution margin | 4.20 − 1.35 | 2.85 per cup |
| Margin ratio | 2.85 ÷ 4.20 | 67.9% |
| Break-even units | 6,500 ÷ 2.85 | 2,281 cups / month |
| Break-even revenue | 2,281 × 4.20 | 9,580 |
| Over 26 trading days | 2,281 ÷ 26 | 88 cups / day |
That last line is the one worth converting to. A monthly figure is abstract; 88 cups a day is a claim about the business you can actually judge as plausible or not.
Break-even is more sensitive to price and variable cost than to fixed cost, because those two change the divisor:
| Change | New margin | Break-even units | Shift |
|---|---|---|---|
| Baseline | 2.85 | 2,281 | — |
| Price up 30 cents | 3.15 | 2,064 | −9.5% |
| Price down 30 cents | 2.55 | 2,549 | +11.8% |
| Variable cost up 25 cents | 2.60 | 2,500 | +9.6% |
| Fixed costs up 500 | 2.85 | 2,456 | +7.7% |
A 7% price increase cuts the required volume by nearly 10%. This is why margin work usually beats cost-cutting: the price line has leverage that the rent line does not.
Breaking even means earning nothing. To find the volume for a profit you actually want, add it to fixed costs:
units for target profit = (fixed costs + target profit) ÷ contribution margin
For 2,000 of monthly profit: (6,500 + 2,000) ÷ 2.85 = 2,982 cups, or 115 a day. That is 31% more volume than break-even, and it is the number a plan should be built around.
Two derived figures tell you how fragile the position is. Suppose actual sales are 3,000 cups.
margin of safety = (3,000 − 2,281) ÷ 3,000 = 24% — sales can fall by roughly a quarter before losses begin.
operating leverage = total contribution ÷ profit = 8,550 ÷ 2,050 = 4.17
That multiplier applies in both directions. A 10% rise in sales lifts profit by about 42% — 3,300 cups yields 9,405 of contribution and 2,905 of profit. A 10% fall cuts profit by the same proportion. High fixed costs and high margins produce high leverage, which is excellent above break-even and brutal below it.
Break-even is a straight-line model, and the line bends in at least five places.
Fixed costs are not fixed; they step. At some volume you need a second member of staff, a bigger machine, more space. Costs jump by a discrete amount and the break-even point resets. Plotted honestly, the cost line is a staircase, and a business can be profitable at 2,500 units and lossmaking at 3,000.
Variable cost per unit is not constant. Volume brings supplier discounts, which lowers it, while overtime and rush shipping raise it.
Price is not constant. Reaching higher volume often requires discounting or promotion, so the extra units arrive at a lower margin than the ones in your model.
The owner is usually missing. This is the most common and most expensive error in a small-business plan. If the founder works full-time and takes no salary, their labour has been valued at zero and the break-even figure is fiction. Put a market wage for yourself into fixed costs before believing any of the output.
Profit is not cash. Break-even is an accounting concept and ignores timing. A business past break-even on paper can still fail, because inventory was paid for in March and the invoice settles in June. Break-even tells you nothing about the working capital needed to get there, and cash-flow projection is a separate exercise you still have to do.
Multiple products add a further wrinkle: with more than one item you must use a weighted-average contribution margin based on the sales mix, and the break-even point moves whenever that mix shifts — even at constant total revenue. Selling the same money in low-margin items instead of high-margin ones can push you back below break-even with no visible change in the top line.
This is general business information, not financial or accounting advice. Figures for a real plan should be reviewed with an accountant who can see your actual numbers and local tax position.
Not usually. Break-even is normally computed pre-tax, since income tax applies to profit and there is none at break-even. For a target-profit figure, decide whether the target is before or after tax and be consistent — an after-tax target must be grossed up by your rate.
No. It is not losing money at that moment, at that cost structure, with that mix. Margin of safety tells you how much room there is, and the answer is often less than owners expect.
Split it. A phone line with a standing charge plus per-minute usage is fixed on the standing charge and variable on the usage. Guessing wrong here distorts the margin, which is the figure everything else depends on.
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