How to calculate it
Split costs into fixed costs that don't change with volume (rent, salaries) and variable costs that do (coffee beans, cups). Price minus variable cost per unit is the contribution margin. Break-even units = fixed costs ÷ contribution margin per unit. A coffee shop with $9,000 in monthly fixed costs, selling lattes at $4.50 with $1.50 in variable cost, earns $3 per cup and must sell 3,000 cups a month—about 100 a day—to break even. In dollars, divide fixed costs by the contribution margin ratio.
Uses and limits
Managers also track the margin of safety (how far sales exceed break-even) and operating leverage (high fixed costs make profit swing more with sales). Raising prices, cutting variable costs, and trimming fixed costs all lower break-even. The model assumes constant prices and unit costs, struggles with shifting product mixes, and ignores opportunity costs such as an owner's forgone salary. Price discrimination changes contribution margins and thus the math.
FAQ
- Does passing break-even mean positive cash flow?
- Not necessarily—loan principal and other cash needs aren't in the calculation.
- Is depreciation fixed?
- Usually, yes.
Sources reviewed: 2026-10-26
References
- Horngren, C. T., Datar, S. M., & Rajan, M. V. (2015). Cost Accounting: A Managerial Emphasis (15th ed.). Pearson.
- Garrison, R. H., Noreen, E. W., & Brewer, P. C. (2021). Managerial Accounting (17th ed.). McGraw-Hill.