What is the break-even point?
The break-even point is the sales volume at which revenue equals total costs, so there is neither profit nor loss. Every riyal you sell beyond it adds profit, and every shortfall below it means a loss. It matters because it turns a vague question such as “Is the project viable?” into a specific number: how many orders do I need every day?
It matters even more for restaurants in particular, because their fixed costs are relatively high and revenue fluctuates between days of the week and seasons. Knowing the minimum number of orders helps the owner assess each day on its own instead of waiting for the end of the month.
Fixed and variable costs and the contribution margin
The calculation is based on dividing costs into two types:
- Fixed costs: do not change with the number of orders during the month, such as rent, core staff salaries, depreciation and subscriptions.
- Variable costs: rise with every order, such as raw materials, packaging, delivery app commissions and payment terminal fees.
The difference between the selling price and the variable cost per unit is called the contribution margin; it is what remains from each order to contribute to covering fixed costs and then to profit.
The basic formulas:
- Break-even point in units = Fixed costs ÷ Contribution margin per unit
- Contribution margin ratio = Contribution margin per unit ÷ Selling price
- Break-even point in SAR = Fixed costs ÷ Contribution margin ratio
Example: a fast-food restaurant in Jeddah
Monthly fixed costs:
| Item | SAR per month |
|---|---|
| Rent | 25,000 |
| Salaries | 45,000 |
| Electricity, water and gas (base level) | 6,000 |
| Depreciation of equipment and fixtures | 4,000 |
| Subscriptions and fixed marketing | 5,000 |
| Total | 85,000 |
Data per order: the average bill excluding VAT is 50 SAR, and the variable cost is 20 SAR (17 SAR raw materials and 3 SAR packaging and payment fees).
- Contribution margin = 50 − 20 = 30 SAR per order
- Contribution margin ratio = 30 ÷ 50 = 60%
- Break-even point in orders = 85,000 ÷ 30 = 2,833.3, i.e. 2,834 orders per month
- Break-even point in SAR = 85,000 ÷ 0.60 = approximately 141,667 SAR
- Daily, based on 30 days: about 95 orders
If the owner wants a monthly profit of 20,000 SAR: (85,000 + 20,000) ÷ 30 = 3,500 orders, i.e. sales of 175,000 SAR.
Margin of safety and scenario testing
The margin of safety measures how far sales can fall before reaching a loss. If the restaurant actually sells 3,200 orders a month, i.e. 160,000 SAR, the margin of safety = (160,000 − 141,667) ÷ 160,000 = approximately 11.5%. This is a narrow margin; a single weak month could turn profit into loss.
| Scenario | Contribution margin | Break-even orders per month |
|---|---|---|
| Current situation | 30 SAR | 2,834 |
| Raising the average bill to 55 SAR | 35 SAR | 2,429 |
| Raw materials rising to 20 SAR | 27 SAR | 3,149 |
| Rent increasing to 35,000 SAR | 30 SAR | 3,167 |
The table shows that a 5 SAR increase in the average bill, through combo meals or add-ons, lowers the break-even point by about 400 orders a month. This is often easier than bringing in 400 new customers.
How do you use the number in decisions?
The break-even point is not a number you calculate once and then forget. Before signing a lease for a new branch, calculate the break-even point of that branch alone, then ask: is the required number of daily orders realistic given the foot traffic at the location? And before signing up for a marketing campaign with a fixed cost of 10,000 SAR, calculate how many additional orders you need to cover it: 10,000 ÷ 30 = approximately 334 orders a month, or about 11 additional orders a day. If the campaign cannot bring in that number, it is a loss before it starts.
It also helps when discussing promotions: a meal at a 20% discount means a price of 40 SAR and a contribution margin of only 20 SAR, so you need to sell one and a half orders at the promotional price to make up for every order that would have been sold at full price.
Common mistakes
- Treating delivery app commissions as a fixed cost, when they are actually variable and their rate may differ by app; calculate a separate margin for app orders.
- Forgetting the owner's salary if they work in the restaurant, which makes the break-even point look lower than it really is.
- Relying on an outdated average bill without reviewing it monthly from point of sale (POS) data.
- Assuming fixed costs stay fixed forever; opening an extra shift or hiring a new chef raises them and moves you to a new break-even point.