Break-even point: how many cups a day must a café sell to cover its costs?
If 60 cups of coffee are sold every day, the café makes neither a profit nor a loss. Why, with average sales of 85 cups, is Monday still a loss? Contribution margin, the margin of safety, what happens if rent goes up or milk gets dearer, and operating leverage on the example of one café.
Nodira opened a small coffee shop called «Sahar» next to the university. In the first month the till seemed full of money, but at the end of the month, after paying the rent and wages, almost nothing was left in hand. She began looking for the answer to one question: how many cups a day do I need to sell to at least avoid a loss?
All figures are hypothetical and compiled by the author. We assume the café is open 30 days a month and, for simplicity, sells only coffee.
Which costs are fixed and which are variable?
The first step: split the costs in two. A variable cost comes with every cup sold; if a cup is not sold, that cost does not exist either. A fixed cost is paid regardless of how many cups are sold in a month.
| Variable cost per cup | soum |
|---|---|
| Coffee beans | 4 500 |
| Milk | 2 500 |
| Cup and lid | 1 800 |
| Sugar and napkin | 700 |
| Total | 9 500 |
| Monthly fixed cost | soum |
|---|---|
| Rent | 9 000 000 |
| Wages of two baristas and related payments | 14 400 000 |
| Utilities | 2 700 000 |
| Depreciation of the coffee machine and furniture | 1 800 000 |
| Total | 27 900 000 |
Fixed costs per day: 27 900 000 : 30 = 930 000 soum.
How much of each cup's money is left for fixed costs?
A cup costs 25 000 soum. Subtract the variable cost and what remains is the contribution margin: 25 000 − 9 500 = 15 500 soum. This money first "covers" the fixed costs, and only once they are covered does profit begin.
Contribution margin ratio: 15 500 : 25 000 = 0.62. In other words, out of every 1 000 soum of revenue, 620 soum goes towards fixed costs and profit.
Where is the break-even point?
The formula is simple: fixed costs : contribution margin per unit.
- In cups: 930 000 : 15 500 = 60 cups a day.
- In money: 930 000 : 0.62 = 1 500 000 soum of daily revenue (check: 60 × 25 000 = 1 500 000).
If fewer than 60 cups a day are sold, the café makes a loss; if more, each extra cup brings 15 500 soum of profit.
Why is the cash break-even point lower?
The fixed costs include 1 800 000 soum of depreciation. It is an expense, but it does not leave the till every month: Nodira paid for the machine once, earlier. So the sales needed to "keep the till from running dry" are calculated differently:
(27 900 000 − 1 800 000) : 30 = 870 000 soum a day; 870 000 : 15 500 ≈ 56.1, that is 57 cups.
Between 57 and 60 cups there is enough cash in the till, but the wear on the machine is not covered. A few years later it will turn out that no money has been put aside for a new machine.
Why are some days a loss even with average sales of 85 cups?
Nodira recorded a week of sales: on average 595 : 7 = 85 cups a day. But the days are not the same.
| Day | Cups | Difference from break-even point | Result for the day, soum |
|---|---|---|---|
| Monday | 52 | −8 | −124 000 |
| Tuesday | 55 | −5 | −77 500 |
| Wednesday | 58 | −2 | −31 000 |
| Thursday | 61 | +1 | +15 500 |
| Friday | 78 | +18 | +279 000 |
| Saturday | 120 | +60 | +930 000 |
| Sunday | 171 | +111 | +1 720 500 |
| Week | 595 | +2 712 500 |
The profit for the week is 2 712 500 soum (equal to 7 × 387 500), but three days end in a loss. The practical conclusion: measures such as an early-week promotion, a breakfast set or a morning discount for university students should be aimed precisely at lifting these days above the break-even point.
What does the margin of safety show?
The margin of safety shows how far actual sales are from the break-even point:
(85 − 60) : 85 ≈ 0.294, that is 29.4%.
What it means: if average sales fall by more than 29.4%, the café goes into loss. Profit per day: 25 × 15 500 = 387 500 soum; per month: 387 500 × 30 = 11 625 000 soum.
What happens if rent goes up, milk gets dearer or the price is raised?
| Situation | Calculation | New break-even point |
|---|---|---|
| Current position | 930 000 : 15 500 | 60 cups |
| Rent up by 1 500 000 soum a month | (27 900 000 + 1 500 000) : 30 : 15 500 = 63.2 | 64 cups |
| Milk up by 1 000 soum per cup | 930 000 : 14 500 = 64.1 | 65 cups |
| Price raised to 27 000 soum | 930 000 : 17 500 = 53.1 | 54 cups |
| Target profit of 15 000 000 soum a month | (27 900 000 + 15 000 000) : 30 : 15 500 = 92.3 | 93 cups |
When the result is a fraction, it is rounded up: you cannot sell 63.2 cups, and the 64th cup is needed to close the loss.
Note: milk getting 1 000 soum dearer had an even heavier effect than rent rising by 1 500 000 soum. That is because a variable cost falls on every cup.
Operating leverage: if sales rise by 10%, how much does profit rise?
Operating leverage = contribution margin : profit. At 85 cups: (85 × 15 500) : (25 × 15 500) = 1 317 500 : 387 500 = 3.4.
This means that if sales rise by 10% (85 → 93.5 cups), profit rises by 3.4 × 10% = 34%: (93.5 − 60) × 15 500 = 519 250 soum, which is 34% more than 387 500. But leverage works both ways: if sales fall by 10%, profit also falls by 34%. The closer you are to the break-even point, the greater the leverage and the more sensitive the café is to every swing in sales.
A reminder for Nodira
- Record costs every month split into fixed and variable: the expense accounts in the books do not give this split by themselves, so analytical records are needed for it.
- Tell the baristas the break-even point as a daily plan too: a goal like "today, after 60 cups we are working for profit" is easy to understand.
- Before raising the price, also calculate the drop in customers: at 27 000 soum the break-even point is 54 cups, but if sales fall from 85 to 70, the daily profit will be 70 × 17 500 − 930 000 = 295 000 soum, which is less than the current 387 500.
Test yourself
5 questions on this topic: pick an option or reveal the answer.
In a hypothetical country in one year: household consumption spending 500, investment 150, government purchases 200, exports 120, imports 170 (bln units). What is GDP by the expenditure approach?
A hypothetical dairy workshop made 400 cheeses in a month: total cost was 12,000,000 soums, of which fixed cost was 4,000,000 soums. What is the average total cost (ATC) per cheese?
Dilnoza quit a job paying 6 mln soums a month and opened a flower shop. The shop's monthly revenue is 25 mln soums, and its expenses paid in cash are 15 mln soums. Taking opportunity cost into account, what is the monthly economic profit?
On a hot day a traveler drank ayran glass after glass. His total utility (in arbitrary units): after the 1st glass 10, after the 2nd 18, after the 3rd 24, after the 4th 28. What is the marginal utility of the 3rd glass?
The monthly fixed costs of the "Qaldirg'och" shoe workshop are 6 000 000 soum, and the variable cost of one pair of shoes is 20 000 soum. If 300 pairs are made per month, what is the average total cost per pair?
Answered: 0 / 50 of 5 correct
All tests →See also
Sources
- Fundamentals of economics and management accounting (general concepts) · fixed and variable costs, contribution margin, contribution margin ratio, break-even point, margin of safety, operating leverage
- Example, café name, prices, costs and calculations · compiled by the author, hypothetical