Break-Even Analysis And Target Profit

Break-even point

level of sales where revenue is equal to total costs

Calculating the break even point

fixed costs/contribution costs per unit

margin of safety

Actual level of sales - break even point

Contribution sales ratio

Contribution per unit/selling price

Revenue needed to break even

fixed costs/contribution sales ratio

Benefits of break even analysis

• To assess the viability of a new business

• To set targets

• Evaluate changes to the business

• To support applications for bank loans

Limitations of break even analysis

• Assumptions about costs and selling prices may be incorrect

• Fixed costs eventually increase in order to go beyond certain levels of output

• Assumptions about how likely a business is to achieve the target level of sales is incorrect

Target profit

Calculating the level of sales or amount of revenue needed to achieve a certain profit

Level of sales needed to get set profit

(FC + target profit) / contribution per unit

Contribution sales ratio

Contribution per unit/ selling price

Revenue needed to achieve a target profit figure

(TC +target profit)/ contrivution sales ratio