1.6.2 the relationship between revenue and costs
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8 Terms
What is contribution per unit?
Contribution = Selling price – Variable cost per unit; profit made on each product
What is total contribution?
Total contribution = Contribution per unit × Number of units sold
How is profit calculated using contribution?
Total profit = Total contribution – Fixed costs
What is the break-even point?
The level of output where total costs = total sales revenue; costs are fully covered
How do you calculate the break-even point using contribution?
Break-even output = Total fixed costs ÷ Contribution per unit
What is the margin of safety?
Margin of safety = Actual level of output – Break-even output; indicates how much sales can fall before losses occur
Why is a falling margin of safety bad?
It shows the firm is closer to making a loss; less buffer against lower sales