Break-even calculator

How the break-even formula works

Each sale first has to pay its own variable costs. What's left, the contribution, goes towards your fixed costs, and break-even is the point where enough contributions have built up to cover them all:

Break-even units = fixed costs ÷ (selling price − variable cost per unit)

Break-even sales = break-even units × selling price

The calculator rounds the units up, because 747.8 benches can't be sold and 747 would leave you just short. The margin of safety is expected sales minus break-even: the cushion you have before a weak month turns into a loss. Units for a target profit use the same division, with the target added to the fixed costs.

Worked example

A fictional 26-person joinery workshop makes hardwood garden benches for garden centres. Its fixed costs are £86,000 a month: the workshop lease, salaried makers and office staff, machinery leases, insurance and software. A bench sells for £320 excluding VAT, and the timber, fixings, finish, packaging and delivery for one come to £205.

• Each bench contributes £115 towards fixed costs.
• £86,000 ÷ £115 = 747.8, so the workshop breaks even at 748 benches a month, or £239,360 of sales.
• It expects to sell 820, a margin of safety of 72 benches (8.8%) and a profit of £8,300 for the month.
• To make £15,000 a month it would need 879 benches.

These are the calculator's default figures. The thin margin of safety warns the directors that a wet spring, when garden centres order less, could tip a month into a loss, so they plan cash for it.

Reading the result

The break-even figure only means something next to two others: what you expect to sell and what you can physically make or deliver.

• Against expected sales. A margin of safety of 8.8% means sales can fall by less than a tenth before the month loses money. How much cushion you need depends on how much your sales swing from month to month, so look at your own last two years.
• Against capacity. If break-even sits close to the most you can produce, there's little room to grow without adding cost. A capacity plan shows where that ceiling is.
• Per working day. 748 benches over 21 working days is about 36 a day. A daily or weekly number is easier for a team to track than a monthly one.

Fixed, variable or somewhere in between

The calculation assumes every cost is either fixed or rises in step with each unit. Real costs are messier:

• Semi-variable costs, such as energy or vehicle running costs, have a fixed part and a part that grows with volume. Split them as best you can rather than putting the whole bill on one side.
• Step costs stay flat until volume crosses a line, then jump: a second shift, another van, a bigger unit. If your target needs more than today's capacity, add the step to fixed costs and run it again.
• Several products can share one calculation if you use a weighted average: total contribution across the range divided by total units sold. If the mix shifts towards cheaper lines, break-even moves up even though no price or cost has changed.

Common mistakes

• Working with VAT-inclusive prices, which overstates the contribution from every sale.
• Putting loan repayments in fixed costs. Interest is a cost; the capital you repay isn't, though it still needs cash.
• Mixing periods, such as annual fixed costs against monthly sales.
• Treating break-even as the goal. It's the floor. Plan from the target profit figure.
• Running it once. Re-run the figures whenever a supplier, wage rate or price changes. The price increase calculator shows how much volume a rise can afford to lose.