The formulas
Contribution margin = Price - Variable cost
Break-even units = Fixed costs / Contribution margin
Break-even revenue = Break-even units x Price
Units for target profit = (Fixed costs + Target profit) / Contribution margin
The logic behind it: every sale contributes price minus variable cost toward covering fixed costs. Once total contribution equals fixed costs, you are at break-even. Every sale after that is profit.
Worked example
Fixed costs $10,000/month, price $50, variable cost $30, target profit $5,000:
- Contribution margin: $50 − $30 = $20 per unit
- Break-even units: $10,000 ÷ $20 = 500 units
- Break-even revenue: 500 × $50 = $25,000
- Margin ratio: $20 ÷ $50 = 40%
- Units for $5,000 profit: ($10,000 + $5,000) ÷ $20 = 750 units
Note the second half: reaching break-even at 500 units and earning $5,000 at 750 units means the next 250 units generate the entire profit. This is why businesses with thin contribution margins have to fight for every extra sale.
Typical contribution margins by business type
| Business type | Price | Variable cost | Contribution | Margin ratio |
|---|
| Software / SaaS | $30 | $3 | $27 | 90% |
| Digital products | $20 | $1 | $19 | 95% |
| Professional services | $100/h | $30/h | $70/h | 70% |
| Coffee shop | $5.00 | $3.20 | $1.80 | 36% |
| Ecommerce (marketplace) | $40 | $26 | $14 | 35% |
| Wholesale distribution | $100 | $88 | $12 | 12% |
Read the last row carefully: at a 12% margin ratio, $10,000 of fixed costs needs $83,333 of revenue to break even. At a 90% ratio, the same fixed costs need only $11,111.
Common mistakes
- Categorising costs wrongly. Payment processing fees scale with sales, so they are variable, not fixed. A monthly software subscription is fixed even if you barely use it.
- Forgetting the owner's own draw. If you need $4,000 a month to live, that is a fixed cost. Leaving it out produces a break-even point that cannot sustain you.
- Using a whole year for a seasonal business. Fixed costs recur monthly; if revenue is seasonal, calculate break-even per season.
- Assuming break-even is the goal. Break-even means zero profit. It is a floor, not a target.
- Ignoring that margin drops with scale. Discounts, returns and product mix shifts all reduce contribution margin, pushing break-even higher.
Frequently asked questions
What is contribution margin?
Selling price minus variable cost per unit. It is the amount each sale contributes toward covering fixed costs, and once fixed costs are covered, toward profit.
Does break-even include my own salary?
Depends how you classify it. If you pay yourself a fixed amount regardless of sales, treat it as a fixed cost. If you draw whatever is left over, it is not a cost at all and break-even should exclude it.
Why is my break-even point so high?
Usually a thin contribution margin. If price is $20 and variable cost is $18, each sale contributes only $2 toward fixed costs, so $10,000 of fixed costs needs 5,000 sales.
What if contribution margin is negative?
Then no volume reaches break-even. Every sale makes the loss bigger. Either raise the price or cut the variable cost; growth cannot fix this.
Should I calculate break-even per month or per year?
Match the period of your fixed costs. If fixed costs are monthly, use monthly fixed costs to get a monthly break-even volume that you can compare against actual monthly sales.
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