In this article
Every business starts the month in the red. Rent, salaries and software are due whether you sell one item or a thousand. Break-even tells you exactly how far into the month the red turns to black, and it needs only three numbers.
Two kinds of cost
Fixed costs do not change with sales in the short run: rent, salaries, loan interest, subscriptions. Variable costs rise with every unit: raw material, packaging, delivery, payment fees. Break-even depends on keeping the two lists apart.
What each sale contributes
Each unit you sell brings in ₹500, but ₹300 of it is used up making and delivering that unit. The ₹200 left is the contribution. It goes first towards the fixed costs and, once those are paid, becomes profit.
The contribution margin is ₹200 ÷ ₹500 = 40%. Forty paise of every sales rupee is available to pay fixed costs.
The two main lines cross at 300 units, the break-even point. To the left the cost line is higher, so you lose. To the right the revenue line is higher, so you profit.
Profit and loss at different volumes
At 200 units the contribution is ₹40,000, so ₹20,000 of the fixed costs is left unpaid. At 450 units the first ₹60,000 pays the fixed costs and the next ₹30,000 is profit.
How far can sales fall? The margin of safety
If you expect to sell 450 units, your break-even is 300, so you are 150 units above it. Divided by 450, that is a margin of safety of 33%. Sales could fall by a third before you start losing money.
- Fragileunder 10%
- Workable10–25%
- Comfortableover 25%
The bands are a rough rule of thumb, not an official standard. Seasonal businesses usually want more cushion.
Five levers that move the break-even point
A 10% higher price (₹550) cuts the target by 20%. But a higher price may also cut how many units you sell, so test it carefully.
- Raise the price. Every rupee goes straight into the contribution. See markup vs margin before you pick a number.
- Cut variable costs. Cheaper packaging, better supplier terms or fewer returns raise the contribution per unit.
- Cut fixed costs. A ₹20,000 lower rent moves break-even from 300 units to 200 units.
- Change the mix. If you sell several products, push the ones with the highest contribution.
- Avoid deep discounts. A 10% discount on a ₹500 item cuts contribution from ₹200 to ₹150 and pushes break-even from 300 to 400 units. The stacked discount guide shows how fast it adds up.
| Fixed cost | ₹450 | ₹500 | ₹550 |
|---|---|---|---|
| ₹40,000 | 267 | 200 | 160 |
| ₹60,000 | 400 | 300 | 240 |
| ₹80,000 | 533 | 400 | 320 |
Units are rounded up in practice. The ringed cell is our example. Darker means you need more sales to break even.
Setting a profit target
To earn ₹30,000 a month, add it to the fixed costs: (₹60,000 + ₹30,000) ÷ ₹200 = 450 units. The same formula works for any target.
Limits of the simple model
- It assumes the price and the variable cost stay the same at every volume. Bulk discounts and overtime break that.
- Some costs are in between, such as a salary that steps up when you hire. Treat them as fixed for each range of volume.
- It ignores timing. You may need cash for stock long before the sales come in, so a business that breaks even on paper can still run short.
- Taxes and loan repayments are not in the simple formula. Add loan interest to fixed costs and plan repayments separately.
Questions people ask
What is the break-even formula?
Break-even units = fixed costs ÷ (selling price per unit − variable cost per unit). Break-even sales = fixed costs ÷ contribution margin ratio.
What is contribution margin?
It is the price minus the variable cost per unit. It is the amount each unit contributes towards fixed costs and then profit.
Is rent a fixed or variable cost?
Rent is normally a fixed cost because it does not change with the number of units you sell.
How can I lower my break-even point?
Raise the price, cut variable costs, cut fixed costs, or shift sales to higher-contribution products.
What does margin of safety mean?
It is how far sales can fall below your expected level before you reach break-even. (Expected sales − break-even sales) ÷ expected sales.