Break even analysis for a small business, in 10 minutes
The break even point is the level of sales where revenue covers every cost and profit is zero. To find it, divide the fixed costs for a period by the contribution each sale makes. A bakery with USD 12,000.00 of fixed costs a month and USD 20.00 of contribution per unit breaks even at 600 units. The break even calculator does the sum and adds a target profit and a margin of safety.
Fixed costs and variable costs
Break even analysis splits every cost into one of two groups. Fixed costs stay the same for the period whether the business sells a little or a lot. Variable costs go up with each unit sold. The checklists below cover the costs that a typical small shop, cafe, or maker sees.
- Fixed: rent or a lease, salaried staff, insurance, software and phone plans, accounting fees, loan payments, and equipment leases.
- Variable: ingredients or materials, packaging, delivery for each order, card and payment fees, sales commission, and hourly staff whose hours follow sales.
Some costs are partly both, such as electricity in a bakery, where the lights cost the same every day and the ovens run more on busy days. A practical split puts the steady part in fixed costs and estimates the rest per unit. The result is an estimate, and it is only as good as that split.
Contribution per unit
Every sale first pays for its own variable cost. Whatever is left over is its contribution, and contributions are what pay the fixed costs. Once the fixed costs are covered, each further contribution is profit.
- Contribution per unit = selling price minus variable cost per unit
- Contribution margin ratio = contribution per unit / selling price
- Break even units = fixed costs / contribution per unit
- Break even revenue = break even units x selling price
The bakery example, worked through
All figures in this example are USD, for one month. A small bakery sells one average product, such as a celebration cake. It sells for 50.00 and costs 30.00 in ingredients, boxes, and delivery. Rent, wages, and other fixed costs come to 12,000.00 a month.
| Step | Working | Result |
|---|---|---|
| Contribution per unit | 50.00 minus 30.00 | USD 20.00 |
| Contribution margin ratio | 20.00 / 50.00 | 40.00% |
| Break even units | 12,000.00 / 20.00 | 600 units |
| Break even revenue | 600 x 50.00 | USD 30,000.00 |
At 600 units a month, the bakery covers its costs and earns nothing. Unit 601 adds USD 20.00 of profit, and so does every unit after it. Below 600, each missing sale leaves USD 20.00 of fixed costs unpaid.
Revenue gives a second route to the same answer. The ratio says that 40% of every dollar of sales is contribution, so the fixed costs are covered at 12,000.00 / 0.40, which is again USD 30,000.00.
Adding a target profit
Break even answers how to avoid a loss. A target profit answers how much to sell for a chosen result. Add the target to the fixed costs and divide by the contribution again. For a profit of USD 6,000.00 a month, that is (12,000.00 + 6,000.00) / 20.00, which is 900 units, or USD 45,000.00 of sales.
Expected sales show how safe the plan is. If the bakery expects 800 units, it sits 200 units above break even. That margin of safety is 25.00% of expected sales, and the profit at 800 units is (800 x 20.00) minus 12,000.00, which is USD 4,000.00.
What changes the break even point
Break even moves when price, variable cost, or fixed cost moves. The table changes one input at a time from the bakery example, to show how sensitive the result is.
| Change | Contribution | Break even | Revenue at break even |
|---|---|---|---|
| None (the example) | USD 20.00 | 600 units | USD 30,000.00 |
| Price up to 55.00 | USD 25.00 | 480 units | USD 26,400.00 |
| Variable cost up to 32.00 | USD 18.00 | 667 units | USD 33,333.33 |
| Fixed costs down to 10,800.00 | USD 20.00 | 540 units | USD 27,000.00 |
A price rise of 10% cuts break even by 120 units, because the whole rise goes into contribution. A 10% cut in fixed costs saves 60 units. A small rise in an ingredient price adds 67 units. A higher price can also change how many cakes sell, which the break even figure cannot show on its own. The profit margin calculator shows the margin at each of those prices.
Loan payments belong in fixed costs when the analysis is about cash. If the bakery repays a loan at USD 400.76 a month, its monthly fixed costs become 12,400.76. Break even rises to 620.04 units, rounded up to 621, because a fraction of a cake cannot be sold. The loan and EMI calculator works out the payment for any loan.
Several products: the weighted average
Most businesses sell more than one thing. When the sales mix is fairly steady, a weighted average contribution stands in for a single product. Suppose 75% of the bakery's units are loaves at 8.00, costing 3.00 each, and 25% are cakes at 40.00, costing 15.00 each.
| Item | Price | Variable cost | Contribution | Share of units |
|---|---|---|---|---|
| Loaf | 8.00 | 3.00 | 5.00 | 75% |
| Cake | 40.00 | 15.00 | 25.00 | 25% |
| Weighted average | 16.00 | 6.00 | 10.00 | 100% |
With USD 12,000.00 of fixed costs, break even is 12,000.00 / 10.00, which is 1,200 units in total. At the same mix, that is 900 loaves and 300 cakes, bringing in USD 19,200.00. If the mix shifts toward loaves, break even rises, so the mix matters as much as the totals.
A monthly check routine
- Update fixed costs from last month's bank statement and bills.
- Recheck the variable cost per unit against recent supplier invoices.
- Run break even again with the current price and costs.
- Compare actual units sold with break even and with the target.
- Note what moved, and which input caused it.
A freelancer can run the same check with hours as units. The guide on setting a freelance hourly rate works from the other direction, starting with the income and costs to cover.
Break even questions
Why is break even rounded up? Units are sold whole. At 620.04 units, selling 620 still leaves a small loss, so the first whole number that covers the costs is 621.
Can break even be measured in hours? Yes. For a service business the unit can be an hour or a job. The price is the rate charged, and the variable cost is anything paid for each hour or job.
What if the price is below the variable cost? Then each sale loses money before fixed costs are counted, and no volume of sales reaches break even. The calculator reports that instead of a number.