BIZOMAT Tools · Money
Break-even and Margin of Safety
How much must you sell before you break even?
Finds the volume at which a product or service covers its fixed costs and shows the profit and margin of safety at the expected volume.
Open the calculatorRuns in your browser. No account needed.
How this tool works
Inputs, units and where to find them
| Input | Unit | Typical source |
|---|---|---|
| Fixed costs | $ | Fixed costs for the period from the budget (rent, salaries, depreciation) |
| Selling price / unit | $ | Net selling price per unit after discounts |
| Variable cost / unit | $ | Variable cost per unit from the costing system |
| Expected volume / period | units | Sales forecast for the same period as the fixed costs |
What each input means
Open an input to see what it is, its units, the worked example and the common mistakes, with a small diagram.
What this means: Fixed costs
- What it is
- Costs for the period that do not change with how many units you sell, such as rent, salaries, insurance and depreciation.
- Units and format
- Enter a number in $: an amount of money; use one currency for every money input. The form accepts $0 or more.
- Example
- The form opens with $20000 as a worked example. It is an illustration, not a recommended value: replace it with your own figure.
- Effect on the result
- Higher fixed costs raise the break-even volume and revenue.
- Get it right
- Use the same period (month, quarter or year) for fixed costs and the expected volume.
What this means: Selling price / unit
- What it is
- The net amount you receive for one unit after discounts, rebates and commissions.
- Units and format
- Enter a number in $: an amount of money; use one currency for every money input. The form accepts $0.01 or more.
- Example
- The form opens with $25 as a worked example. It is an illustration, not a recommended value: replace it with your own figure.
- Effect on the result
- A higher price increases contribution per unit and lowers break-even volume.
- Get it right
- Use the price actually achieved, not the list price, if customers usually get discounts.
What this means: Variable cost / unit
- What it is
- The cost that rises with each extra unit sold: materials, direct labour paid per unit, packaging, freight and sales commission.
- Units and format
- Enter a number in $: an amount of money; use one currency for every money input. The form accepts $0 or more.
- Example
- The form opens with $14 as a worked example. It is an illustration, not a recommended value: replace it with your own figure.
- Effect on the result
- A higher variable cost reduces contribution per unit and raises break-even volume.
- Get it right
- Keep fixed costs out of this figure; mixing them in double-counts them.
What this means: Expected volume / period
- What it is
- The number of units you expect to sell in the same period as the fixed costs, from your sales forecast.
- Units and format
- Enter a number in units: a count of units. The form accepts 0 units or more.
- Example
- The form opens with 2500 units as a worked example. It is an illustration, not a recommended value: replace it with your own figure.
- Effect on the result
- It does not move the break-even point, but sets the profit and margin of safety.
- Get it right
- Match the period to the fixed costs: a monthly forecast with annual fixed costs gives a wrong margin of safety.
Method and formulas
- Contribution per unit = price − variable cost
- Break-even units = fixed costs ÷ contribution per unit
- Profit = expected volume × contribution − fixed costs
- Margin of safety = (expected − break-even) ÷ expected
Limitations
- Assumes constant price and unit cost at all volumes
- Single product (or a stable mix)
- Fixed costs assumed constant within the relevant range
Typical uses
- Pricing and launch decisions
- Checking whether a forecast is above break-even
- Testing the effect of fixed-cost changes
Who it is for
- Owners and general managers
- Product and sales managers
- Finance staff
What you get
- ABOVE BREAK-EVEN, THIN MARGIN OF SAFETY, BELOW BREAK-EVEN or NO CONTRIBUTION
- Contribution per unit and margin
- Break-even units and revenue
- Profit and margin of safety at expected volume
Interpreting the result
- A margin of safety under 20% means a modest sales shortfall would cause a loss
- No contribution means volume cannot help: change price or cost
References
- Cost–volume–profit analysis: Horngren, Datar and Rajan, Cost Accounting: A Managerial Emphasis (Pearson)
Learn the Concepts Behind This Tool
These BIZOMAT Library readings explain the method this tool uses, with worked examples.
Method explained here · Library collection
Two breakeven numbers every owner should know: your monthly revenue floor and the rent-or-buy crossover
In Pricing, Margins and Profitability
What it covers: Fixed costs divided by contribution margin is the revenue you need each month to stand still. How discounts and commitments move it, why cash differs, and how to use breakeven to rent or buy
BIZOMAT tools are screening and decision-support utilities. Verify important financial, engineering, safety, legal or operational decisions using appropriate professional standards and your organisation’s approved data.