Break-even analysis: formula and worked example

Break-even analysis estimates the sales level at which the costs included in your model are covered. For a single product, contribution per unit is selling price minus variable cost per unit. Divide period fixed costs by that contribution to estimate break-even units. The categories matter: costs that increase with each sale belong in the variable assumption, while costs incurred regardless of that period’s volume belong in the fixed assumption. Mixed costs need an explicit treatment.

A hypothetical workshop sells a service for $200 and incurs $80 in direct variable costs per appointment. Contribution is $120. With $12,000 of monthly fixed costs, operating break-even is 100 appointments: $12,000 divided by $120. At 120 appointments, the modeled surplus is $2,400 before any excluded costs. State whether owner compensation, taxes, depreciation, financing costs and other obligations are included. A model cannot cover a cost you have left outside it.

If the workshop discounts the service to $180 while variable cost stays $80, contribution falls to $100 and break-even rises to 120 appointments. A discount that fills the calendar can therefore leave less room for mistakes. Check whether staff and equipment can deliver that many appointments without overtime or rework. If capacity tops out below break-even, higher sales ambition does not solve the model. You need a different price, cost structure, offer or capacity plan.

Operating break-even is not automatically cash break-even. Customers might pay after delivery while payroll is due now, and principal repayments can create a cash requirement outside your operating-profit calculation. Pair the analysis with a dated cash forecast. For several products, use a disclosed sales mix and test what happens when customers choose lower-margin items. Revisit the assumptions after actual trading begins. This is a planning calculation with hypothetical figures, not an estimate of your business’s financial performance.

Bring current prices, variable-cost evidence, fixed commitments and practical capacity to the meeting. Record the treatment of owner compensation and any cost not included in the model. Compare the current price with a discount and a higher-service package. For each case, show contribution per unit and the volume needed to cover the same fixed costs. Ask whether that volume is physically deliverable and commercially credible. If a scenario depends on an untested sales mix, label it as an assumption rather than a result.