5.5 Break-even analysis

Contribution

the sum of money that remains after all direct and variable costs have been taken away from sales revenue

Contribution per unit

The proportion of the selling price for each unit of product that will go toward paying off total fixed costs

Total contribution

The quantity of product needed to go towards paying off total fixed costs

Break-even chart

x-axis : Sales quantity, y-axis : cost and revenue

Target profit quantity

(Fixed cost + Target Profit) / (Price - Average variable cost)

limitations of break-even chart as a decision making tool

1. Involves assumptions that:

   1. All cost functions are linear

   2. Sales revenue function is linear

   3. All output will be sold

2. Not useful to a dynamic business environment due to its static nature.

3. Ignore other quantitative and qualitative factors.