$40 a tune-up. But when do you start making money?
The story so far After a few years at the bike shop, you know bikes. So you start a weekend side business: tune-ups at the farmers market. You charge $40 a tune-up, and the parts for each one cost you $10. The market spot costs $200 a month, and tools and insurance add $100 a month. Your first month, you do 6 tune-ups, take in $240, and still lose money. How many tune-ups do you need before you make a single dollar? This lesson shows you how to find out before you open.
Profit is what's left after every cost is paid. The break-even point is the number of sales where you stop losing money.
Most new businesses fail because the numbers never worked. Ten minutes of math can tell you if an idea can pay.
Split costs into fixed and variable, find what each sale adds, then divide.
Small-business owners run these numbers every month. Small-business advisors check them for new owners. Pricing analysts and financial analysts at big companies do the same math with bigger numbers.
What you're looking at: one $40 tune-up split into its $10 of parts and the $30 left over. Each $30 goes into the jar for your $300 of monthly fixed costs. It takes 10 tune-ups to fill the jar. After that, every tune-up's $30 is profit.
The numbers behind every business.
A food truck, a lawn service and a tech company all run on the same few numbers: what comes in, what goes out, and how many sales it takes to cover the bills.
Revenue
Revenue is all the money customers pay you, before you pay any costs. Some people call it sales.
- A busy month
- 25 tune-ups × $40 = $1,000 of revenue.
Fixed and variable costs
Fixed costs stay the same whether you sell nothing or a lot. Variable costs go up with every sale.
- Fixed
- Market spot $200 + tools and insurance $100 = $300 a month, even if you do zero tune-ups.
- Variable
- Parts: $10 per tune-up. 25 tune-ups = 25 × $10 = $250.
Profit
Profit is what's left after you pay every cost. If it's negative, it's a loss.
- 25 tune-ups
- $1,000 − $300 − $250 = $450 profit.
- Your first month, 6 tune-ups
- $240 − $300 − $60 = −$120, a $120 loss.
Contribution margin
The contribution margin is what each sale leaves over after its own costs. That leftover pays the fixed costs first, then becomes profit.
- One tune-up
- $40 − $10 = $30. Every tune-up adds $30 toward the $300 of fixed costs.
The break-even point
The break-even point is the number of sales where you stop losing money and haven't made any yet. Below it, you lose money. Above it, you make some. If the answer has a decimal, round up: you can't sell part of a tune-up.
- Your tune-ups
- $300$30 = 10 tune-ups a month. Tune-up number 11 is your first dollar of profit.
Profit margin
Profit margin shows how much of each dollar of sales you keep. It lets you compare a small business with a big one.
- 25 tune-ups
- $450$1,000 = 0.45, a 45% profit margin. You keep 45 cents of every dollar.
Is a higher price always better?
A higher price adds more per sale, but some customers walk away (Lesson 8.2). What matters is the total.
- At $40
- 25 customers: 25 × $30 − $300 = $450.
- At $50
- Only 18 customers: each adds $50 − $10 = $40, so 18 × $40 − $300 = $420. The higher price earns $30 less.
What you're looking at: your tune-up business with $300 of fixed costs and $10 of parts per tune-up. The green line is revenue; the orange line is total costs. Where they cross is the break-even point. The dashed line marks how many tune-ups you did.
Two minutes. Just listen.
Tap any line to jump to it.
Break-even or bust.
Eight small businesses. Each one gives you the numbers. Work it out, then tap your answer. One try each.
What you're looking at: made-up small businesses. Each lists its prices and costs, then asks one question.
The logic, step by step.
Before you start any business, run these three steps.
Step 1: Sort your costs
- Fixed
- Market spot and tools: $300 a month.
- Variable
- Parts: $10 for each tune-up.
Step 2: Find what each sale adds
- One tune-up
- $40 − $10 = $30.
Step 3: Divide, and round up
- Tune-ups
- $300$30 = 10 a month.
Worked example: a bigger spot
- The offer. A better market spot costs $380 a month instead of $200. Your fixed costs become $380 + $100 = $480.
- What each sale adds. Still $40 − $10 = $30.
- New break-even. $480$30 = 16 tune-ups a month, up from 10.
- Is it worth it? Only if the better spot brings at least 6 more tune-ups a month: 6 × $30 = $180, the extra rent.
- The lesson. Every new fixed cost raises the bar. Know how many extra sales it needs before you sign.
The hummingbird's energy budget.
A hummingbird burns energy so fast that it has to feed many times an hour just to break even. Its heartbeat and wingbeats are a fixed cost it pays every minute. On cold nights, when it can't feed, it drops into torpor, a deep sleep that slows its heart and lowers its body temperature, cutting its energy use sharply until morning.
What you're looking at: an illustration, not data. On the left, a hummingbird feeding during the day. On the right, the same bird at night in torpor, its body slowed down to save energy.
Why this sticks. Like a business, a hummingbird has costs it pays no matter what. When it can't bring in enough, it survives by cutting those fixed costs. Owners do the same in a slow season: smaller spot, fewer subscriptions, shorter hours.
The page you'd copy down.
- Revenue = price × number sold. 25 × $40 = $1,000.
- Fixed costs stay the same ($300 a month). Variable costs rise with each sale ($10 per tune-up).
- Profit = revenue − fixed − variable. $1,000 − $300 − $250 = $450.
- Contribution margin = price − variable cost. $40 − $10 = $30.
- Break-even = fixed costscontribution margin. $300$30 = 10. Round up.
- Profit margin = profitrevenue. $450$1,000 = 45%.
- Higher price isn't always better: $50 × 18 customers earned $420 vs. $450 at $40.
Fill in the blanks
Grab a friend or a study group.
Pitch and price
Each person invents a tiny business. List its fixed and variable costs and a price. The group finds the break-even point.
Sort the costs
Pick a real local shop. Together, list every cost you can think of and sort each one: fixed or variable?
Price war
Use the slider above. One person sets a price; the other guesses how many customers it would get. Who finds the most profitable price?
Just you and your money.
These stay on this device. Nobody else sees them.
Exam-style questions.
Written the way a college exam would ask them. Each right answer on the first try is worth 10 xp.
On the job: you're a small-business advisor
A client runs a food truck and asks if raising prices is a good idea. Here are the numbers:
- Fixed costs: $6,000 a month (truck loan, permits, insurance).
- Average meal: $12. Food and packaging: $4 a meal.
- Sales now: 1,200 meals a month.
- The idea: raise the average meal to $14. They expect to lose 10% of customers, so 1,080 meals.
Your task: find the break-even point and the monthly profit now. Then work out the profit at the new price. What do you advise?
See a model answer
Now: each meal adds $12 − $4 = $8. Break-even is $6,000$8 = 750 meals a month. Profit: 1,200 × $8 − $6,000 = $3,600.
At $14: each meal adds $14 − $4 = $10. Break-even drops to $6,000$10 = 600 meals. Profit: 1,080 × $10 − $6,000 = $4,800.
Advice: the raise adds $1,200 a month, even after losing 120 customers. Test it for a month and track the real sales, because the 10% loss is a guess.
Where business begins.
What you're looking at: a map of where this lesson fits in the course. Read it left to right: the lessons it builds on, this lesson in the middle, and the lesson that comes next.
- Back · Unit 8Why prices are what they are
- Back · Unit 10The math of percent and growth
- Back · Unit 8Every choice has a price tag
- You are hereWill your business make money?
- Next · Unit 11Profitable and still broke