Collaborative practice applying Difference between markup and margin calculations with scaffolded support
Now that you can calculate markup and margin, the next question is: where do those costs come from? Understanding your cost structure is what makes pricing decisions defensible — not just to yourself, but to an investor or stakeholder sitting across the table.
Sarah's business has two kinds of costs: ones she pays every month no matter what (fixed), and ones that only appear when she takes on a client project (variable). Getting this distinction right is the foundation for calculating an accurate margin — and knowing how many projects she needs each month just to break even.
Why This Connects to Markup & Margin
Margin is only meaningful when you're using total costs — not just the obvious ones. If Sarah forgets to include her contractor fees or platform charges in her per-project costs, her "60% margin" is an illusion. The exercise below uses Sarah's actual expense list so the numbers you work with here will carry forward into the advanced analysis in Phase 4.
Before sorting, discuss with a partner (2 minutes):
- If Sarah had zero client projects this month, which bills would she still have to pay?
- How does knowing her fixed costs help Sarah set a minimum price for each project?
- What would happen to her margin calculation if she accidentally treated a variable cost as fixed?
Drag each of TechStart's expenses into the correct bucket. As you sort, the cost-volume-profit chart below will update live — watch the break-even intersection shift with every item you place.
The sorting test
Ask yourself: "Would Sarah pay this cost if she had no client projects this month?" If yes — it's Fixed. If it only happens per project — it's Variable.
Domain & Hosting
TechStart website and client portal hosting — fixed fee
$120
Laptop Depreciation
Monthly depreciation on Sarah and Alex's laptops
$180
Accounting Software
QuickBooks subscription — fixed monthly fee
$150
Alex's Salary
Full-time employee salary — same regardless of project load
$4,500
Contractor Fees
Freelance developers hired per project when needed
$420/unit
Payment Processing Fees
2.9% Stripe fee charged on each invoice collected
$45/unit
Freelance Design
Graphic designer hired for assets on each project
$200/unit
Client Reporting Tools
Dashboard and analytics tools billed per active client
$30/unit
Equipment Loan Payment
Laptop and monitor financing — fixed monthly installment
$600
Office Lease
TechStart's downtown co-working space — same every month
$2,200
Business Insurance
General liability policy — fixed annual premium
$350
Project Management Software
Asana seats scale with active projects — per-project cost
$20/unit
Ad Spend Management
Platform fees (Google/Meta) charged per client campaign
$85/unit
Stock Photo Licenses
Images purchased per client website or campaign
$15/unit
Travel & Client Meetings
Transportation and coffee meetings per client onboarded
$65/unit
Drop fixed costs here
Drop variable costs here
Total Fixed Costs
$0
Variable Cost/Project
$0
Contribution Margin
$1,200
per project
Break-Even Projects
0
per month
Break-Even Revenue
$0
Break-Even Interpretation:
Sarah needs to complete 0 client projects per month at $1,200 each to generate $0 and cover all her costs. Every project beyond that contributes $1,200 to profit.
Attempts
0
Assigned
0/15
Look at where the revenue line and total cost line cross on the CVP chart — that's Sarah's break-even point. To the left of it she's losing money. To the right, every additional project adds pure profit. Now connect this back to what you learned in Phase 2:
Margin needs all costs
When Sarah calculates margin on a project, she must include all variable costs — contractor fees, design, platform charges, everything. If she leaves any out, her margin looks healthier than it actually is and she'll under-price.
Fixed costs shift the floor
The dashed blue line on the chart represents Sarah's fixed costs — the floor she has to rise above before a single dollar of profit appears. A higher contribution margin per project means a steeper revenue line and a lower break-even point.
What Sarah now knows
With her cost structure mapped, Sarah can answer three essential pricing questions:
- • What is the minimum price she can charge per project and still cover her variable costs?
- • How many projects does she need at that price just to break even each month?
- • What price gives her the margin needed to also cover fixed costs and generate profit?
Share with your partner (3 minutes):
- What happened to the break-even point on the chart as you classified more costs correctly?
- If Sarah raised her average project price by $200, how would the chart change? Would the break-even move left or right?
- A competitor runs their business from home with no office lease. How does that shift their break-even compared to Sarah's?
- Based on TechStart's cost structure, what pricing advice would you give Sarah for her next client proposal?