Refresh CVP fundamentals and bridge directly into pricing decisions
Jennifer handed Sarah a blank spreadsheet. “Before you pick a price,” she said, “you need to understand exactly where your money goes and how many projects it takes to break even. Let's map it out.” That map is called a Cost-Volume-Profit (CVP) model.
A CVP model has three building blocks: fixed costs (what Sarah pays no matter what), variable costs (what each project costs to deliver), and contribution margin (what each project contributes toward covering those fixed costs). Once you have all three, you can calculate break-even and work backward from any profit target.
These costs exist every month whether Sarah completes 1 project or 24. They do not change with volume.
- Office rent$1,500
- Alex's salary$3,200
- Business insurance$400
- Software licenses$600
- Phone & internet$150
- Equipment lease$1,000
- Marketing & client acquisition$1,250
Total: $8,100 / month
These costs rise with every project Sarah takes on. Deliver more projects and these costs grow proportionally.
- Domain & hosting setup$150
- Stock photos & graphics$180
- Third-party plugins & tools$200
- Client revisions & communications$120
- Subcontracted copywriting/SEO$230
Total: $880 / project
Each project brings in revenue, but Sarah must first pay her variable costs out of that revenue. Whatever is left over contributes to covering fixed costs and generating profit. That amount is called the contribution margin (CM).
Contribution Margin = Selling Price − Variable Cost per Project
CM also expressed as a percentage of price: CM Ratio = CM ÷ Price
Value Launch
$1200 − $880
CM = $320
CM ratio: 26.7%
Balanced Core
$1350 − $880
CM = $470
CM ratio: 34.8%
Premium Plus
$1500 − $880
CM = $620
CM ratio: 41.3%
Notice: the variable cost stays fixed at $880 no matter which price Sarah chooses. Picking a higher price directly increases her CM without adding any cost.
Select a pricing scenario. The chart will update to show that option's revenue line and total-cost line. Find the point where the two lines cross — read its value on the horizontal axis. That is the break-even volume. Enter your reading below and check it.
Balanced Core — price $1,350, variable cost $880, fixed costs $8,100/month
For the Balanced Core scenario: at how many projects do the Revenue and Total Costs lines cross?
Value Launch
—
Balanced Core
—
Premium Plus
—
The break-even point is the number of projects Sarah must complete in a month for revenue to exactly cover all costs—where profit equals zero. Every project above break-even is pure profit.
Break-Even (Projects) = Fixed Costs ÷ Contribution Margin per Project
Value Launch
$8,100 ÷ $320
= 26 projects
Balanced Core
$8,100 ÷ $470
= 18 projects
Premium Plus
$8,100 ÷ $620
= 14 projects
Higher price → larger CM → fewer projects needed to break even.
Profit = (CM per Project × Projects Completed) − Fixed Costs
Example: $470 × 24 projects − $8,100 = $3,180 monthly profit at the $1,350 price and full capacity.
This formula is Sarah's decision engine. Change the price, and CM changes. Change the volume, and profit changes. In Guided Practice you'll run all three options through this formula to find the strategy worth defending to investors.
1. What is the key difference between fixed costs and variable costs?
2. TechStart charges $1,350 per project and spends $880 per project on variable costs. What is the contribution margin per project?
3. The break-even point formula is:
4. Why does a higher selling price make it easier to reach break-even?
5. TechStart has fixed costs of $8,100/month and a contribution margin of $470 per project (at the $1,350 price). What is the break-even volume?
- 1TechStart's fixed costs are $8,100/month — the same no matter how many projects she delivers.
- 2Variable cost is $880 per project — it rises exactly in step with each new project.
- 3Contribution margin = Price − $880. The three options give CM of $320, $470, or $620.
- 4Break-even = $8,100 ÷ CM. Higher CM means fewer projects to reach break-even.
- 5Every project above break-even adds pure profit equal to the CM per project.
Coming Up: Guided Practice
You'll run a four-step decision sequence with these same numbers: Contribution Margin Sprint → Break-Even Ladder → Capacity Reality Check → Target-Profit Reverse Solve. The goal is a pricing recommendation Sarah can defend to investors.