Enter your selling price and variable cost per unit, or your sales and variable costs for the period, plus your fixed costs. You get the break-even point in units and in sales and the contribution margin ratio. Add your expected sales and you also get your profit, your margin of safety and the point in the year when you break even. Every step of the working is shown.
Split fixed and variable costs
Fixed costs are there however much you sell: rent, salaries, business rates. Variable costs rise as your sales do: extra raw materials, extra labour, transport. That is how nibusinessinfo.co.uk, Northern Ireland’s official business advice service, divides them. A cost with a fixed part and a variable part can be split between the two.
Per unit or from totals
Per unit works from the price of one product, or one hour or day of a service, and what each one costs you to supply. It also gives the number of units you need to sell. From totals works from your sales and variable costs for a year or a month, as they appear in your accounts or a forecast. If you sell at several prices, use an average price.
Leave VAT out
If you are VAT-registered, enter amounts excluding VAT: you pay HMRC the difference between the VAT you charge and the VAT you pay on business purchases, so neither is part of your sales or your costs. On the VAT Flat Rate Scheme you cannot reclaim the VAT on your purchases, except for certain capital assets over £2,000, so enter those costs including VAT. If you are not registered, enter what you actually charge and what you actually pay.
When you break even
With your expected sales, the calculator works out how far into the period you break even, assuming sales come in evenly: break-even sales ÷ sales × 12 months. Add the first day of your financial year to get a date, counted on the calendar. For monthly figures, set the period to 1 month. If your trade is seasonal, you will break even earlier or later than this, so add up your sales month by month instead.
Rounding
Amounts are rounded to the nearest penny, with halves rounded up, from exact values: the contribution margin ratio is never rounded before dividing. Units are rounded up, because one unit fewer still leaves a loss: Business Wales’s own example gives 1,667 units for £10,000 ÷ £6, which is 1,666.67.
Contribution per unit = selling price − variable cost per unit.
Break-even point in units = fixed costs ÷ contribution per unit, rounded up.
Contribution margin ratio = contribution ÷ sales.
Break-even sales = fixed costs ÷ contribution margin ratio.
Margin of safety = sales − break-even sales; as a ratio, divided by sales.
Sales for a target profit = (fixed costs + target profit) ÷ contribution margin ratio.
Example: £10,000 of fixed costs
Business Wales’s example: a product sells for £6 and costs £2 a unit to make, so each unit contributes £4. With £10,000 of fixed costs a year, you break even at £10,000 ÷ £4 = 2,500 units, which is £15,000 of sales. At £8 the contribution is £6 and break-even falls to 1,667 units; at £4 it rises to 5,000. Taking the example further: if you expect to sell 3,000 units at £6, that is £18,000 of sales, a £2,000 profit and a £3,000 margin of safety, and you break even 10 months into the year.
