Break-Even Analysis: Concept and Formula

Three Key Components

  • Fixed costs: rent, salariés, insurance, subscriptions -- these remain constant regardless of sales volume
  • Variable cost per unit: raw materials, packaging, commissions -- these increase proportionally with each sale
  • Contribution margin: selling price minus variable cost per unit. This is how much each unit sold contributes toward covering fixed costs

The Break-Even Formula

Break-even (units) = Fixed costs / Contribution margin per unit

Break-even (revenue) = Break-even units x Selling price

Example: A Coffee Shop

  • Monthly fixed costs (rent, staff, equipment): 8,000 EUR
  • Price per coffee: 3.50 EUR
  • Variable cost per coffee (beans, milk, cup): 0.80 EUR
  • Contribution margin: 2.70 EUR
  • Break-even point: 8,000 / 2.70 = 2,963 coffees per month
  • That is roughly 99 coffees per day (over 30 days)