Business explainer
Where Profit Begins
Every item you sell brings in its price and costs its materials. What is left over, the contribution margin, goes first to pay the fixed costs you owe no matter how many you sell. The break-even point is the sale that pays the last dollar of them; every sale after it is profit.
- revenue = price × units
- total cost = fixed + variable
- fixed costs
- green: profit · red: loss
Your business
The numbers
- Contribution margin per unit
- Contribution margin ratio
- Break-even point (units)
- Break-even sales (dollars)
- Profit at 60 units
- Margin of safety
- Units for target profit
Profit at different volumes
| Units | Revenue | Variable costs | Fixed costs | Total cost | Profit |
|---|
In a spreadsheet
Put the price in B1, variable cost per unit in B2, fixed costs in B3 and expected units in B4.
- Contribution margin
=B1-B2- Contribution margin ratio
=(B1-B2)/B1- Break-even units
=ROUNDUP(B3/(B1-B2),0)- Break-even dollars
=B3/((B1-B2)/B1)- Profit
=B4*(B1-B2)-B3- Margin of safety
=(B4-B3/(B1-B2))/B4
What to notice
Fixed costs (a table fee, tools, rent) stay the same whether you sell one item or a hundred. Variable costs (flour, lumber) grow with every unit. So the cost line starts at the fixed costs and rises; the revenue line starts at zero and rises faster, if your price is above your variable cost.
Left of the crossing, the gap between the lines is a loss; right of it, a profit. Raise the price and the revenue line tips up, so the crossing moves left: you need fewer sales.
Why it works
Each unit sold adds its contribution margin, price − variable cost, toward the fixed costs. Break-even units are fixed costs ÷ contribution margin. Since you cannot sell part of a cookie, round up to the next whole unit.
The contribution margin ratio says how much of each sales dollar is left after variable costs. Dividing fixed costs by it gives break-even in dollars of sales.
“For which of you, intending to build a tower, sitteth not down first, and counteth the cost, whether he have sufficient to finish it?” Luke 14:28
Try it
- Bake sale: find the break-even point by hand. Why is the answer 39 cookies and not 38?
- Raise the cookie price to $2.00. How many fewer cookies must you sell to break even?
- Woodshop: the booth fee rises by $130. How many more boards must you sell?
- Which helps the woodshop more: cutting variable cost by $2 a board or raising the price by $2? Check both.
- How many boards earn a $400 profit? Check with the target-profit box.
Costs are treated as straight lines: the same price and the same cost per unit at every volume, which is the usual first model. All arithmetic is done in whole cents in your browser. No outside code, images or trackers.