Find the exact number of sales you need to cover all costs — and what happens above and below that point. See your contribution margin, margin of safety and the effect of price or cost changes on profitability.
| Selling Price | Gross Margin | Break-Even Units | Break-Even Revenue |
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Break-even analysis tells you exactly how much you need to sell to cover all your costs — and what happens above and below that point. Every pound of revenue above break-even contributes directly to profit at your contribution margin rate. Understanding this number is not optional: it is the foundation of every pricing decision, investment decision and growth plan.
Break-even units = Fixed Costs ÷ Contribution Margin per Unit. Contribution Margin = Selling Price − Variable Cost per Unit. Break-even revenue = Fixed Costs ÷ Gross Margin %. The margin of safety = (Current Sales − Break-even Sales) ÷ Current Sales × 100. A 20%+ margin of safety is generally considered healthy.
Contribution margin is the per-unit version: selling price minus variable cost per unit. Gross margin is the percentage version at total revenue level. A £50 product with £20 variable cost has a £30 contribution margin (60% gross margin). Every unit sold above break-even contributes £30 toward profit.
Fixed costs do not change with sales volume — rent, salaries, software subscriptions, insurance. Variable costs change proportionally with each unit sold — raw materials, packaging, shipping, payment processing fees, sales commissions. The distinction is critical: misclassifying costs distorts your break-even analysis.
Break-even units = Fixed Costs / (Selling Price - Variable Cost per Unit). Break-even revenue = Fixed Costs / Gross Margin %. For a business with £5,000 monthly fixed costs, £50 selling price and £20 variable cost (£30 contribution margin, 60% gross margin): break-even = 167 units or £8,333 revenue per month.
Three levers: (1) Reduce fixed costs — move to remote work, share premises, renegotiate contracts; (2) Reduce variable costs — negotiate with suppliers, improve efficiency, reduce waste; (3) Increase selling price — the most powerful lever because it directly increases contribution margin. A 10% price increase on a 60% gross margin product reduces your break-even units by approximately 14%.
Margin of safety = (Current Sales - Break-even Sales) / Current Sales × 100. It shows how much sales can fall before you hit break-even. A 25% margin of safety means sales could drop 25% before you break even. Below 10% is precarious. Above 30% is comfortable. Seasonality, economic conditions and competitive changes make a healthy margin of safety critical.