5.5 Break Even Analysis

Break Even Analysis

a management tool used to calculate the level of sales needed to cover all costs of production, where any more sales will generate profit

Break Even Chart

the name given to the graph that shows a firm's costs, revenues, and profits (or loss) at various levels of output

Break Even Point

the position on the break-even chart where the total cost line intersects the total revenue line (where TC=TR)

Break Even Quantity

the level of output that generates neither a profit nor loss.

Contribution

the sum of money that remains after all direct or variable costs have been deducted from the sales revenue of a product.

Contribution per unit (Unit Contribution)

the difference between the selling price of a product and its variable costs of production. The surplus goes towards paying fixed costs

Loss

this exists when a firm's total costs exceed its total revenues. This occurs at all levels of output or sales below the break even quantity.

Margin of Safety

the difference between a firm's level of demand and its break even quantity.

Profit

the positive difference between a firm's revenue and its costs.

Target Price

the price set by a firm in order to reach break even or a certain target profit

Target Profit

the amount of surplus a firm intends to achieve, based on price and cost data. It is calculated by deducting total costs from expected sales revenues.

Target Profit Output

the sales volume or level of output required to achieve the target profit that business managers expect to achieve by the end of a given time period.

Total Contribution

essentially, a firm's gross profit