Renzo DemartiniIn short
- Reconcile the extra fixed commitment first, then divide it by the contribution from the expected sales mix.
- Compare the break-even volume with expected sales and with practical capacity that operations can show.
- Test a weaker mix, and have sales, operations and finance each own one assumption before approval.
A proposed team adds A$20,000 a month of fixed cost. Will sales cover it, and can the business deliver the volume?
Break-even answers the first question. The owner also needs capacity, sales mix and a named owner for each assumption.
Start with the existing commitment
A new team and its support lift monthly fixed costs from A$60,000 to A$80,000
| Fixed cost | Current | Proposed |
|---|---|---|
| Existing overhead | A$60,000 | A$60,000 |
| New team, with on-costs | A$0 | A$18,000 |
| Extra support and software | A$0 | A$2,000 |
| Total | A$60,000 | A$80,000 |
Sample monthly amounts, excluding GST. No saving or payback is claimed. Software and support are inside the A$2,000.
Illustrative figures, not client data.
Business Queensland says break-even is ‘the point where your total revenue (sales or turnover) equals total costs’. A growth paper needs both the current and the proposed position.
Start from the ledger, the staffing plan and the purchasing commitments. Assign each cost once. Business Queensland says ‘Fixed expenses stay the same no matter how many items you produce or how many sales you make’. Contracted team hours become a fixed monthly commitment. Materials stay variable.
Ask your accountant to confirm the cost treatment and owner pay. This is general planning information, not tax advice.
Keep the sales mix visible
A 50:50 mix of two products gives an average contribution of A$40 a unit
| Product | Unit price | Variable cost | Contribution | Unit mix |
|---|---|---|---|---|
| Standard | A$100 | A$70 | A$30 | 50% |
| Premium | A$150 | A$100 | A$50 | 50% |
| Weighted average | A$125 | A$85 | A$40 | 100% |
Illustrative figures, not client data.
For several products, weight each contribution by its share of sales. Here A$30 × 50% plus A$50 × 50% gives A$40. Use realised prices after discounts.
Break-even is fixed costs divided by contribution per unit. CPA Australia says: ‘Undertake a break-even analysis to determine what you need to sell before you make a profit.’ That is a sales target, not a forecast of demand. Record who owns the mix. The formula assumes the mix holds, so a drift towards the standard product changes the decision quietly.
Compare the threshold with capacity
The new team adds 500 expected units and A$20,000 of cost, so the surplus stays A$8,000
| Measure | Current | Proposed |
|---|---|---|
| Break-even (fixed costs ÷ A$40) | 1,500 units | 2,000 units |
| Practical capacity | 1,800 units | 2,400 units |
| Expected sales | 1,700 units | 2,200 units |
| Surplus before interest and tax | A$8,000 | A$8,000 |
Illustrative figures, not client data.
The extra 500 units contribute A$20,000, and the extra fixed commitment costs A$20,000. Growth here protects the surplus. It does not improve it. Ask whether that trade supports the objective.
Operations must show practical capacity, including downtime and training.
Test the weaker mix
A weaker mix lifts break-even above expected demand and turns A$8,000 into −A$3,000
| Case | Mix, standard/premium | Contribution | Break-even | Surplus at 2,200 units |
|---|---|---|---|---|
| Expected | 50% / 50% | A$40 | 2,000 units | A$8,000 |
| Weaker mix | 75% / 25% | A$35 | 2,286 units | −A$3,000 |
Sample, monthly. Break-even is rounded up to a whole unit. Prices and variable costs are unchanged.
Illustrative figures, not client data.
At the weaker mix, expected demand falls below the break-even point. Capacity is still available, but the economics have changed. Keep the original case beside the revision.
Label estimates clearly. business.gov.au says ‘If you use estimated costs, you need to label them clearly.’ Break-even is not cash timing. The business.gov.au cash flow guide says to consider the costs you need to pay and ‘when you will pay them’.
Preserve the approval record
Each owner signs one assumption, and the business owner defers hiring on the weaker mix
| Owner | Evidence accepted | Decision |
|---|---|---|
| Sales lead | Order assumptions: 2,200 units, 50% premium | Recheck the mix before hiring |
| Operations lead | Practical capacity of 2,400 units, training included | Accepted |
| Finance lead | A$80,000 fixed commitment, cost bridge reconciled | Accepted |
| Business owner | The weaker mix gives −A$3,000 | Defer hiring until demand evidence improves |
Illustrative figures, not client data.
Keep the decision attached to its inputs, and give the owner a revised paper when prices, costs or demand change. business.gov.au says to review prices ‘whenever your costs or market conditions change’. The job margin guide covers contribution by job.
Break-even does not show when receipts cover payments. Keep a dated cash forecast beside the growth decision.
What to do first
Five steps turn a break-even sum into an approval the board can read
- 01Reconcile the fixed commitment
Ledger, staffing plan and purchasing, each cost assigned once.
- 02Agree the sales mix
Realised prices after discounts, with a named owner for the mix.
- 03Test break-even against capacity
Operations shows practical capacity, including downtime and training.
- 04Run the weaker mix
Keep the original case beside the revision.
- 05Record who accepts each assumption
Sales, operations, finance and the owner, with a date.
Pick the one commitment you are weighing now.
Common questions
What is the break-even formula?
Fixed costs divided by selling price less variable cost per unit. Business Queensland describes a profit and loss statement as covering ‘a specific period’, so use the same period for every figure.
Does break-even prove the extra team will be profitable?
No. It shows what you must sell, not whether customers will buy. Test orders, sales mix and deliverable capacity separately.
Does break-even include cash timing?
No. It ignores when receipts and payments happen. Keep a dated cash forecast beside it.
Chartered Accountant (CA ANZ) and finance executive, based in Canberra. Practical AI and automation for SMEs, and adviser to owners, CEOs and boards on integration and finance.