How to use the break-even sales calculator
- Fixed costs per month: bills you pay whether or not you sell, such as rent, salaries and insurance.
- How do you know your variable costs? Choose Price and cost per unit if you sell one product, or Percent of sales if you only know the share of revenue that goes to costs.
- Selling price per unit and Variable cost per unit (or Variable costs (% of sales)): the costs that rise with each sale, like materials, packaging and card fees.
- Target profit per month and Expected monthly sales are optional. The first adds a profit goal, the second adds your margin of safety.
- Selling days per month: used to turn the monthly figures into a daily target.
How break-even sales are worked out
Each sales dollar first pays its variable costs. What is left is the contribution margin, which goes toward fixed costs and then profit. Break-even is where it exactly covers fixed costs.
- Contribution margin ratio = (price - variable cost) / price
- Break-even sales = fixed costs / contribution margin ratio
- Sales for a profit goal = (fixed costs + target profit) / contribution margin ratio
- Margin of safety = (expected sales - break-even sales) / expected sales
These are the standard cost-volume-profit formulas taught in OpenStax Managerial Accounting, section 3.2 and section 3.5.
Worked example with the starting numbers
Fixed costs are $10,000 a month. Each unit sells for $80 and has $30 of variable cost, so the contribution margin is $50 per unit, a ratio of 62.50%. Break-even sales are $10,000 / 0.625 = $16,000.00, which is 200 units. Over 26 selling days that is $615.38 a day. To earn $5,000 you need ($10,000 + $5,000) / 0.625 = $24,000.00, which is 300 units or $923.08 a day. If you expect $20,000 of sales, your margin of safety is $4,000.00 or 20.00%, and your profit would be $20,000 x 0.625 - $10,000 = $2,500.00.
Limits and edge cases
- If variable cost is at or above the selling price, every sale loses money and no sales level breaks even. The calculator tells you so instead of showing a number.
- It assumes costs stay put as you grow. A new hire or bigger space raises fixed costs, so rerun it.
- For a mix of products, use Percent of sales with your overall variable cost share.
- The dollar figure is exact; selling whole units rounds it up, and the results show both.
- To see whether sales can carry a new loan, add its monthly payment to fixed costs, which the business loan calculator can give you. For units and the lowest workable price, use the break-even point calculator, and to set prices that deliver your margin, the markup calculator.
Break-even sales questions
How do you calculate break-even sales?
Divide fixed costs by the contribution margin ratio, which is price minus variable cost, divided by price. With $10,000 of fixed costs and a 62.50% ratio, break-even sales are $10,000 / 0.625 = $16,000.00 a month.
What is the difference between break-even sales and break-even units?
They are the same point in two currencies. Break-even units divide fixed costs by the contribution margin per unit, and break-even sales multiply those units by the price. In the example that is 200 units, or $16,000.00 of sales.
What is a good margin of safety?
There is no single benchmark, but a higher number is safer. A 20.00% margin of safety means sales can fall by a fifth before you stop making a profit. Below 0% you are already selling less than break-even.
How much do I need to sell each day to break even?
Divide break-even sales by your selling days. $16,000.00 over 26 days is $615.38 a day. Use the days you are actually open.
What if my variable costs are higher than my price?
Then every sale loses money and more volume cannot fix it. Raise the price or cut variable costs until price is above variable cost.
Sources: OpenStax, break-even point in units and dollars; OpenStax, margin of safety. Results are planning estimates, not accounting advice.