The arithmetic
Split every cost into two piles. Variable costs happen because a sale happened — materials, packaging, the card fee, the delivery commission. Fixed costs happen anyway — rent, salaried staff, insurance, the loan payment. What is left of a dollar of sales after the variable costs is the contribution margin, and break-even is reached when accumulated contribution equals the fixed pile.
In units: break-even units = fixed costs ÷ (price − variable cost per unit). With $12,000 of fixed costs, a $50 price and $30 of variable cost, each sale contributes $20, so it takes 600 units and $30,000 of revenue. In percentage terms the same thing is fixed costs ÷ contribution margin ratio: $12,000 ÷ 0.40 = $30,000.
The two forms give the same answer and you should use whichever matches how you already track things. A restaurant usually knows its food and packaging cost as a percentage. A workshop selling made items usually knows the cost of one. Neither is more correct.
Which pile does it go in
Most of the disagreement is about labour. A salaried manager who is there whether or not anyone walks in is fixed. Shift staff you send home early on a quiet Tuesday are partly variable. Delivery drivers paid per drop are variable. If you are not sure, put it in fixed — it makes break-even higher and errs toward the number you can actually survive.
| Cost | Usually | Why it moves |
|---|---|---|
| Rent, insurance, software | Fixed | Same bill at zero sales |
| Salaried staff | Fixed | Paid regardless of volume |
| Hourly staff on flexible shifts | Mixed | Hours track demand, but only in steps |
| Materials, packaging, freight out | Variable | One more sale, one more unit of it |
| Card and marketplace fees | Variable | A percentage of the sale itself |
| Advertising | Your call | Fixed if budgeted monthly, variable if per-order |
Break-even is not the target
Break-even is the sales level at which you have worked a full month for nothing. If you are the owner and you are not on the payroll line above, the number that matters is the one that includes your own pay, which is why there is a target profit field. Put in what you would have to be paid to do this job for somebody else, and treat the resulting figure as the real floor. The gap between the two numbers is frequently the whole conversation about whether the business works.
The margin of safety is the other half of the picture: how far sales can fall before you cross back under. Twenty percent gives you room for a slow season or a competitor opening down the street. Under ten percent means a bad month and a loss are the same event.
What it cannot see
This is a single-product model applied to a whole business. Real sales are a mix, and the mix changes the contribution margin from month to month — a week where everyone orders the cheap thing has a different break-even from a week where they do not. If your range spans wide margins, run it separately for the parts of the business that behave differently rather than trusting one blended percentage.
Fixed costs also move in steps rather than smoothly. Doubling sales does not double rent, but at some point it means a second location or another shift, and break-even jumps to a new level in one move rather than drifting up. The table above is only honest inside the range where your current fixed costs still hold.
Questions people ask
Where do start-up costs like fit-out and equipment go?
Not straight into fixed costs, because they were paid once rather than every month. Pick the period over which you intend to recover them and put the monthly slice into other fixed costs. A $50,000 fit-out you want back inside five years is about $833 a month. If you borrowed to pay for it, the interest is a genuine monthly fixed cost and belongs there regardless, and the principal repayment is a cash outflow that break-even does not capture — worth tracking separately, because a business can be above break-even and still short of cash.
My sales are seasonal. Does a monthly figure mean anything?
It means something, but only against a matching period. Run it on an annual basis instead: total fixed costs for the year against annual sales, which tells you whether the whole year clears. Then run a peak month and a trough month separately if your fixed costs differ between them. The failure mode with a seasonal business is using an average month to reassure yourself about a quarter that was always going to lose money, and then not having reserved the cash from the good quarter to cover it.
Should advertising be fixed or variable?
It depends on how you buy it. A fixed monthly budget you set in advance is a fixed cost. Spend that scales with orders — a cost per acquisition, or a percentage of revenue you plough back — behaves as variable and should come out of contribution. Getting this wrong in the variable direction is the safer error: it lowers your contribution margin, raises break-even, and makes you look at whether the advertising is actually paying for itself.
What if I sell dozens of different things?
Use the percentage mode with a blended variable cost ratio taken from actual figures — total variable costs divided by total sales over a real period, not an estimate per item. This works as long as the mix stays roughly stable. When it does not, or when one category is clearly subsidising another, split the business into two or three groups and run each. The per-unit mode is really for a single product or an average ticket that genuinely represents what a customer spends.