Contribution is revenue minus variable costs. It is the amount available to cover fixed costs and then provide an operating surplus. Profit after fixed costs answers a different question.
Gross profit uses cost of sales, whose accounting classification may differ from variable costs. Do not substitute a reported gross margin into a contribution calculation without checking what is included.
A one-service example
Assume every job sells for 500, variable cost is 300 per job and fixed monthly costs are 6,000. There are no other costs in this simplified model.
Contribution per job = 500 − 300 = 200
Contribution ratio = 200 ÷ 500 = 40%
Break-even jobs = 6,000 ÷ 200 = 30
| Jobs completed | Revenue | Variable costs | Contribution | After fixed costs |
|---|---|---|---|---|
| 20 | 10,000 | 6,000 | 4,000 | −2,000 |
| 30 | 15,000 | 9,000 | 6,000 | 0 |
| 40 | 20,000 | 12,000 | 8,000 | 2,000 |
The 40% contribution ratio is unchanged in all three rows. Yet the monthly outcome ranges from a loss to a surplus because the same fixed costs must be covered.
Include a profit target
To retain 3,000 after the fixed costs in this model:
Required jobs = (6,000 + 3,000) ÷ 200 = 45
Check whether 45 jobs fit the available hours. A volume target outside your delivery capacity is not an executable plan. Use the capacity planning guide before treating the result as a sales target.
Keep the cost model consistent
For this example, the 300 variable cost must exclude the 6,000 fixed-cost pool. Adding allocated fixed overhead into 300 and then subtracting all 6,000 again counts overhead twice.
“Direct” is not the same as “variable.” A salaried employee can work directly on jobs while their salary remains fixed over the period being modelled. Decide how each cost behaves in the situation you are analysing.
When the simple break-even formula is not enough
The formula assumes one service or a stable mix, constant price and variable cost, and unchanged fixed costs over the relevant volume. A new hire, larger premises or subcontracting threshold can change the result. If price does not exceed variable cost, no positive volume covers positive fixed costs under this model.
The SBA describes the same fixed-cost and unit-contribution framework and its use as an estimate. Break-even reference. The figures and table here are our own teaching example.
Use the break-even calculator with 6,000, 500 and 300 to reproduce the 30-job result. Then read why a discount can require much more work.
About the examples and sources
The figures are hypothetical teaching examples created for AskToBot, not surveyed prices or recommended industry margins. The linked references explain the underlying concepts; they do not supply or endorse these example figures. The arithmetic is checked against the stated assumptions. This is AI-assisted educational content and has not been independently reviewed by an accountant. Read how we check calculations.
Sources & references
- Break-even point — U.S. Small Business Administration
