CH 3 Break-Even Analysis and Pricing Strategies

Break-Even Point (BEP)

The point where total revenue equals total costs, resulting in zero profit.

Methods for Calculating BEP

Equation method, Contribution Margin per Unit method, Contribution Margin Ratio method.

Formula for Break-Even Point in Units

Fixed Costs / Contribution Margin per Unit.

Contribution Margin per Unit Calculation

Selling Price per Unit - Variable Cost per Unit.

Formula for Break-Even Point in Dollars

Fixed Costs / Contribution Margin Ratio.

Effect of Decreasing Selling Price on BEP

BEP increases because the contribution margin per unit decreases.

Cost-Plus Pricing

Pricing strategy where price is set as variable cost plus a percentage markup.

Target Costing

Setting a price based on market conditions while controlling costs for profitability.

Effect of Reducing Fixed Costs on BEP

BEP decreases because fewer units need to be sold to cover costs.

Margin of Safety Calculation

(Budgeted Sales - BEP Sales) / Budgeted Sales.