Lessons · Accounting · the volume that reaches a target profit
How many must we sell to make the profit we want
Break-even asks how many units cover the fixed costs. A target profit asks the same question with the profit added on top: fixed costs plus target, divided by contribution per unit.
Hone is a place to practise a career, one idea a day. This is one of its lessons, written out in full and free to read without an account.
In beta. This lesson was written for Hone and has not yet been checked by a qualified accountant. Practice material, not professional advice. What that means.
What it is for
Break-even on its own is a survival question and businesses do not exist to break even. The useful version is the one an owner actually asks -- what does it take to make the number we promised -- and it is the same arithmetic with one more term.
How to think about it
Add the target profit to the fixed costs. Divide by contribution per unit. Round up, because most of a unit sells for nothing.
Worked example
Fixed costs 30,000, contribution 10.00 a unitBreak-even = 30,000 / 10.00 = 3,000 units.
Target profit 12,000The owner's number, not the accountant's.
Units = (30,000 + 12,000) / 10.00 = 4,200Fixed plus target, over contribution.
Check: 4,200 × 10.00 = 42,000 contribution, less 30,000 fixed = 12,000 profitThe check is always worth the ten seconds.
Your turn
Fixed 30,000, target 12,000, contribution 10.00. Write the line that gives the units.
Units = (30,000 + 12,000) / = 4,200
Solve one, graded on the server
The trap
Dividing by the selling price rather than by contribution. That answers how many units bring in enough REVENUE to equal the fixed costs, which is a meaningless quantity, and it always understates what is needed.