Assumptions
- One product, or a single blended product weighted by sales mix.
- Variable cost per unit and monthly fixed costs stay constant as volume grows. Bulk discounts and capacity expansion are not modelled.
- Operating basis: tax and interest are excluded.
- Inputs stay in your browser and are never stored or transmitted.
How it is calculated
- Variable cost is subtracted from the price to give contribution per unit.
- Monthly fixed costs divided by that contribution gives the break-even volume.
- Adding the target profit to fixed costs and dividing the same way gives the volume for that target.
- Current volume minus break-even volume, over current volume, gives the margin of safety.
Examples
Common mistakes
- Pay yourself in the fixed costs. Leaving the owner's salary out makes a loss look like break-even.
- A price rise can cost you volume. The sensitivity table holds volume constant, which real customers do not.
- Seasonal businesses should also run this annually to check that peak months cover the quiet ones.
FAQ
How do I split fixed from variable costs?
Ask whether the cost goes up when you sell one more unit. Rent, salaried staff and software subscriptions do not, so they are fixed. Materials, packaging, shipping, marketplace commission and card fees do, so they are variable. Mixed items like an electricity bill split into a standing charge, which is fixed, and usage, which is variable.
What is contribution margin?
Price minus variable cost, which is what each sale contributes toward paying off the fixed costs. Selling at $25 with $15 of variable cost leaves $10, so $3,000 of fixed costs needs 300 units. Past that point the contribution becomes profit. It is a more useful number than gross margin when deciding whether to take an order.
What does margin of safety tell me?
How far sales can fall before you hit break-even. Selling 800 units when break-even is 500 gives a 37.5% margin of safety, meaning revenue could drop by more than a third before you lose money. Below about 10% the business is fragile: a slow month tips it into a loss, so either fixed costs or pricing needs work.
Is it better to raise prices or cut costs?
Usually raising the price. At $25 with $15 variable cost, a 10% price rise takes break-even from 300 units to about 250, while a 10% cut in variable cost only reaches about 273. Every cent of a price rise becomes contribution, whereas a percentage cut applies to the smaller variable figure. The catch is that a higher price can reduce volume, which the table does not model.
How do I use this with several products?
Weight the contribution of each product by its share of unit sales and enter that average. If A is 70% of volume at $10 contribution and B is 30% at $6, the blended contribution is $8.80. Recalculate when the sales mix shifts, because break-even moves with it even if nothing else changes.
Is anything I type sent anywhere?
No. The whole calculation runs in this page and your figures never leave your device.