Contribution and break-even
Find the volume at which a higher fixed cost pays for itself.
Quick brief
Contribution per unit is the revenue you retain after variable costs. An option with a higher fixed charge and better contribution per unit becomes more attractive as volume rises.
Deep investigation
With equal volumes and constant unit economics, divide the difference in fixed costs by the difference in contribution per unit. Use the same period on both sides. Distinguish a crossover between options from a break-even point where one option makes zero contribution after fixed costs.
In the fictional Surat case, the difference in fixed costs is ₹8.4 lakh per year. The in-house line retains ₹12 more per metre, so the crossover is 70,000 metres per year. If capacity were only 60,000 metres, the crossover would sit outside the feasible range.
- Compare fixed costFind the additional cost of the in-house option.
- Calculate crossoverDivide by its extra contribution per metre.
- Check feasibilityCompare crossover volume with demand and effective capacity.
Read the story behind the finishing-line decision
Make the call
What happens in Nagpur if the dedicated route retains ₹18 per order instead of ₹24?
Check your answer
The advantage drops to ₹6 per order, and the crossover rises to 45,000 orders over six months. At the 30,000-order forecast, the carrier leads by ₹0.9 lakh.
Practise in context
Interview prompt: explain your recommendation if forecast volume sits within 5% of the crossover. State the two options, use comparable units and propose a reversible commitment.