The case: a custom mug business, one month of costs
A small workshop prints custom mugs to order. Some of its costs arrive every month however many mugs it sells. Others arrive only when a mug is made and shipped. Break-even analysis starts by keeping those two groups apart.
| Cost line | Behavior | Amount |
|---|---|---|
| Workspace rent | Fixed per month | 60,000 |
| Printer lease | Fixed per month | 25,000 |
| Software and a helper's fixed wage | Fixed per month | 35,000 |
| Total fixed costs | 120,000 | |
| Blank mug | Variable per mug | 380 |
| Ink and transfer paper | Variable per mug | 120 |
| Gift box | Variable per mug | 80 |
| Payment and courier fees | Variable per mug | 120 |
| Total variable cost | 700 per mug |
The mugs sell for 1,200 each. The question is how many must sell in a month before the business stops losing money.
Sorting costs is the step that decides the answer
Use one test for each line: if you sold zero mugs this month, would you still pay it? If so, it is fixed. If it rises with every mug, it is variable. Some costs have both parts. A courier contract with a monthly minimum is fixed up to that minimum and variable after it. The printer's electricity has a small standby load plus a per-press load. You can estimate the per-press part from wattage and pressing time using the method in the electricity cost guide.
Misclassifying a cost changes the result. If the 120 courier fee were left out of variable cost, contribution per mug would look like 620 instead of 500, and break-even would look about 19% lower than it really is: 194 mugs instead of 240.
Contribution margin and the break-even point
Each mug contributes 1,200 − 700 = 500 toward fixed costs. 120,000 ÷ 500 = 240 mugs. The contribution margin ratio is 500 ÷ 1,200 = 41.67%, and break-even revenue is 120,000 ÷ 0.4167 ≈ 288,000, which is 240 × 1,200.
Check it: 240 mugs bring in 288,000. Costs are 120,000 fixed plus 240 × 700 = 168,000 variable, which also totals 288,000. The 241st mug is the first one that earns a profit, and it adds 500.
Break-Even CalculatorEnter your own fixed costs, price and variable cost to get contribution per unit and the whole-unit threshold.Contribution margin is not the same as gross margin. In a set of accounts, cost of goods sold can include production overhead such as the printer lease, so the gross margin from the Profit Margin Calculator can be lower than this 41.67%. The margin vs markup guide covers that measure.
How sensitive break-even is to price
Hold fixed costs at 120,000 and variable cost at 700 per mug, then try five prices.
| Price per mug | Contribution per mug | Break-even mugs | Break-even revenue |
|---|---|---|---|
| 1,000 | 300 | 400 | 400,000 |
| 1,100 | 400 | 300 | 330,000 |
| 1,200 | 500 | 240 | 288,000 |
| 1,300 | 600 | 200 | 260,000 |
| 1,400 | 700 | 172 (171.43 exact) | 240,800 |
The curve is lopsided. Cutting the price by 100 raises break-even by 60 mugs, or 25%. Cutting it by 200 raises it by 160 mugs, or 67%. Raising the price by 100 lowers break-even by only 40 mugs. The reason is that the whole price cut comes straight out of the 500 contribution, and contribution is the number you divide by. A 16.7% price cut, from 1,200 to 1,000, shrinks contribution by 40%.
Before running a promotion at 1,000, ask whether it will actually bring in 400 orders a month. That is the volume needed just to cover costs, and it is 67% more than the current threshold.
The other levers: variable cost, fixed cost and a profit target
| Change | Contribution per mug | Break-even mugs |
|---|---|---|
| Base case | 500 | 240 |
| Blank mug cost rises by 100 (variable cost 800) | 400 | 300 |
| Second helper adds 30,000 to fixed costs | 500 | 300 |
| Aim for 50,000 profit (add it to fixed costs) | 500 | 340 |
At this volume, a 100 rise in the cost of each blank has the same effect as hiring someone for 30,000 a month. To find the sales needed for a profit target, add the target to fixed costs: (120,000 + 50,000) ÷ 500 = 340 mugs.
If the workshop expects 300 orders, its margin of safety is 300 − 240 = 60 mugs, or 20% of expected sales. Orders can fall by a fifth before the month shows a loss. A freelancer's minimum hourly rate is the same idea applied to time, as the freelance rate guide shows.
Where this model stops being reliable
- Step costs. If one printer can handle about 350 mugs a month, the 351st order may bring a second lease, and fixed costs jump.
- Fees that are a percentage of price. Card or marketplace fees charged as a percentage change with every price change. Recalculate the variable cost at each price rather than holding it at 700.
- Several products. A shop selling mugs and T-shirts needs a stable sales mix and a weighted contribution per bundle.
- Unsold stock. The formula assumes every unit made is sold. Prints that are spoiled or never collected add cost without revenue.
- Timing and cash. Break-even is measured in profit, not cash. Buying a quarter's blanks upfront can strain cash even while the month is profitable on paper.
- Income tax. Tax applies to profit above break-even and is not part of this threshold.