What is the difference between fixed and variable costs?

Fixed costs stay the same regardless of sales volume (e.g. rent: $1,000/month whether you sell 0 or 1,000 units). Variable costs change per unit sold (e.g. $5 packaging per order). Some costs are mixed — a base fixed portion plus a variable rate.

How do I use break-even analysis to set a price?

Work backwards: decide your target unit volume, then solve for the price that covers fixed costs and variable costs at that volume. Price = (Fixed Costs / Target Units) + Variable Cost. Add your desired profit margin on top.

What is a margin of safety?

Margin of safety = Actual Sales − Break-Even Sales. It tells you how much sales can fall before you start losing money. A higher margin of safety means the business is less vulnerable to downturns.

What is the difference between gross profit and contribution margin?

Contribution margin = Revenue − Variable Costs (used in break-even analysis). Gross profit = Revenue − Cost of Goods Sold (COGS), which includes both variable production costs and allocated fixed production overhead. They are not the same.

Formula Guide

How to Calculate Your Break-Even Point

The break-even point is the level of sales at which total revenue equals total costs — you are making neither a profit nor a loss. Every unit sold above break-even contributes to profit; every unit below means a loss. Understanding your break-even point helps you set prices, evaluate new products, and determine the minimum sales needed to justify a business or project.

Last updated: March 31, 2026

The Formula

Contribution Margin (CM) = Selling Price − Variable Cost per Unit
Break-Even Units = Fixed Costs / Contribution Margin
Break-Even Revenue = Fixed Costs / CM Ratio
CM Ratio = CM / Selling Price

Fixed costs do not change with volume (rent, salaries, subscriptions). Variable costs scale with each unit sold (materials, payment processing fees, shipping).

Variable Definitions

Symbol	Name	Description
FC	Fixed Costs	Costs that remain constant regardless of how many units are sold — rent, insurance, equipment, salaries
VC	Variable Cost	Cost per unit that increases with each sale — materials, packaging, commission, delivery
CM	Contribution Margin	Revenue per unit minus variable cost per unit — the amount each sale contributes toward covering fixed costs

Step-by-Step Example

A freelance course costs $20/unit to produce (variable) and $3,000/month in fixed overhead. It sells for $97. How many units to break even?

Given

Selling price:$97Variable cost per unit:$20Monthly fixed costs:$3,000

Solution

1
Contribution margin per unit: $97 − $20 = $77
2
CM ratio: $77 / $97 = 79.4%
3
Break-even units: $3,000 / $77 = 38.96 → 39 units/month
4
Break-even revenue: 39 × $97 = $3,783/month

You need to sell 39 units per month ($3,783 revenue) to break even. Unit 40 onwards is profit.

Ready to calculate?

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Common Mistakes to Avoid

Forgetting your own salary as a fixed cost — if you pay yourself, that is a fixed cost. Many solo operators undercount fixed costs.

Classifying semi-variable costs incorrectly — some costs are mixed (e.g. electricity: a base amount + per-unit component). Split them appropriately.

Treating break-even as a target — break-even is the floor, not the goal. Set a profit target above break-even.

Ignoring taxes in the break-even calculation — profit above break-even is subject to tax. True break-even after tax is higher.

Frequently Asked Questions

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