Fixed vs variable costs: the simplest useful model

Businesses feel complicated because money moves in many directions: payroll, ads, subscriptions, production, shipping, returns, platforms, and time. The goal of this calculator is not to replace accounting — it’s to create a clean mental model for decisions. When you reduce the chaos into fixed and variable, you can quickly answer questions like:

• Why am I “busy” but not profitable? Often the variable costs are eating the revenue.
• Why does profit jump after a certain revenue level? Fixed costs are finally covered (operating leverage).
• What’s my break‑even? The revenue level where contribution margin covers fixed costs.
• Should I hire? Hiring raises fixed costs; you’ll want to see how much it increases break‑even.

• Revenue is your top line for the period (monthly works best for planning).
• Variable costs scale with sales. If you sell 2× more, these usually rise ~2×. Examples: raw materials, fulfillment, per‑sale commissions, payment processing, per‑user support, platform fees, and per‑unit labor.
• Fixed costs don’t scale (much) in the short run. Examples: rent, salaried staff, software subscriptions, insurance, base payroll, office utilities, and the “minimum” overhead required to operate.
• Contribution margin is revenue minus variable costs. It’s the pool of money that must cover fixed costs and then becomes operating profit.

The calculator supports two ways to express variable costs: (1) as a % of revenue (fast and common for early planning), or (2) as a cost per unit (better if you have unit economics).

• Variable costs (percent mode): VC = Revenue × VC%
• Variable costs (per‑unit mode): VC = Units × VariableCostPerUnit
• Contribution margin: CM = Revenue − VC
• Contribution margin ratio: CMR = CM ÷ Revenue (how much of each $1 contributes)
• Operating profit (simplified): Profit = CM − FixedCosts
• Break‑even revenue: BE Revenue = FixedCosts ÷ CMR (if CMR > 0)
• Break‑even units: BE Units = FixedCosts ÷ (Price − VC per unit) (per‑unit mode only)

Notice what matters most: contribution margin ratio (CMR). If your CMR is 30%, every $1 of revenue contributes $0.30 to fixed costs and profit. That means a $10,000 increase in revenue adds only $3,000 to the pool — and the rest is variable cost. That’s why some businesses need massive volume to “feel” profitable, while others can be profitable at smaller scale.

Three quick scenarios (and the lesson in each)

Scenario A: A service business with low variable costs

Suppose you earn $50,000/month. Variable costs (tools, contractors, payment fees) are ~15% ($7,500). Fixed costs (rent, base payroll, software) are $25,000. Contribution margin is $42,500 and profit is $17,500. Your CMR is 85%, so break‑even revenue is about $25,000 ÷ 0.85 ≈ $29,412. That’s a wide safety margin.

Scenario B: An e‑commerce brand with heavy COGS

Revenue is $50,000/month, but variable costs are 60% ($30,000) due to product COGS, shipping, and returns. Fixed costs are $12,000. Contribution margin is $20,000 and profit is $8,000. CMR is 40%, so break‑even revenue is $12,000 ÷ 0.40 = $30,000. The business can survive dips, but margins matter — a small increase in COGS or ad spend can quickly compress profit.

Scenario C: A SaaS company with high fixed costs

Revenue is $50,000/month, variable costs are 10% ($5,000) because delivery is software. But fixed costs are $60,000 (team payroll, infrastructure). Contribution margin is $45,000 and profit is −$15,000 (loss). CMR is 90%, so break‑even is $60,000 ÷ 0.90 ≈ $66,667. This is operating leverage in action: each additional $10,000 in revenue adds $9,000 toward covering fixed costs — so once you pass break‑even, profits rise fast.

• Low variable cost businesses: protect quality and avoid inflating fixed costs too early.
• High variable cost businesses: pricing, sourcing, and fulfillment efficiency are existential.
• High fixed cost businesses: you must hit volume; when you do, profits accelerate.

What your split means for risk, growth, and decisions

Think of cost structure as a “business thermostat.” When revenue changes, your profit response depends on whether costs move with it. If costs are mostly variable, the business is more flexible (profit doesn’t swing wildly, but it also doesn’t explode upward). If costs are mostly fixed, profit is more sensitive — painful during downturns, powerful during growth.

• 0–30% fixed share: flexible structure. Good for early experimentation and uncertain demand.
• 30–60% fixed share: balanced. Many stable businesses land here.
• 60%+ fixed share: leverage‑heavy. Can scale profit fast, but break‑even discipline is required.

• CMR < 25%: tough economics. You likely need very high volume or a margin fix.
• CMR 25–50%: workable. Efficiency and pricing decisions matter a lot.
• CMR 50–80%: strong. You can fund growth, pay fixed costs, and still have room for profit.
• CMR 80%+: excellent. Watch churn/quality, because small issues can hide behind “good margin”.

Break‑even is not a vibe — it’s a number. If your break‑even revenue is $40,000/month and you’re at $35,000, you’re not “almost profitable” in the way people mean it; you’re funding a $5,000 gap every month. The fix is usually one of these: raise price, lower variable costs, lower fixed costs, or increase volume (while keeping margin).

• If you’re below break‑even, prioritize margin and fixed-cost control before scaling.
• If you’re above break‑even with strong CMR, invest in growth levers (distribution, product, retention).
• If you have high fixed costs, measure runway and plan demand shocks (cash flow matters more).

Frequently Asked Questions

• Is marketing a fixed or variable cost?

  It depends. Performance ads often behave like variable costs (spend rises with sales). Brand/retainer costs behave more like fixed. For this calculator, classify the portion you can quickly turn up/down as variable and the committed portion as fixed.

• What about semi‑variable costs (utilities, support, cloud)?

  Split them: treat the “base” you pay no matter what as fixed, and the part that rises with usage as variable. This is how finance teams model cloud infrastructure and customer support.

• My business has multiple products/prices. What should I enter?

  Use a weighted average for price and variable cost per unit, or run the calculator twice: once for your core offer and once for the rest. You’re looking for directionally correct insight, not perfect precision.

• Why does break‑even sometimes show “not possible”?

  If variable costs are equal to or greater than revenue (CMR ≤ 0), you can’t break even — each sale loses money before fixed costs. Fix pricing/COGS/fees first.

• Is this the same as gross margin?

  Related, but not identical. Gross margin usually means revenue minus COGS. Variable costs here can include more than COGS, such as per‑sale fees and fulfillment. Contribution margin is a broader “per‑sale contribution” view.

• How accurate is the operating leverage meter?

  It’s a simplified indicator based on fixed share and break‑even pressure. True operating leverage varies by time period and how quickly fixed costs step up. Use it as a planning signal, not a scientific measure.