Finance · level 1
Breakeven and operating leverage
Contribution per unit is what each sale leaves after its own costs. Divide the fixed base by it and you know how many units the business must sell before it earns anything.
Worked example: Price $40, variable cost $26, fixed cost $1M. Breakeven units?
contribution$14
fixed cost$1M
breakeven units71,429
Step by step
- 1
Contribution per unit
$40 − $26 = $14
- 2
Cover the fixed cost
$1M / $14 = 71,429 units
- 3
In revenue
71,429 × $40 = $2.86M
- 4
Contribution margin
35%
High contribution margin means high operating leverage — profit swings hard with volume.
Price $40, variable cost $26, fixed cost $1M. Breakeven units? = 71,429
The theory behind it
Intuition
Break-even volume is fixed cost divided by contribution per unit. Operating leverage is just how big that fixed block is relative to contribution.
Common pitfalls
- ×Using gross margin instead of contribution margin.
- ×Treating a step-fixed cost as variable.
In the interview
Pricing and entry cases: how many units before the investment stops losing money.