Beak even

contribution per unit =

selling price – variable costs per unit

total contribution =

contribution per unit × number of units sold

break-even point =

fixed costs/contribution per unit

margin of safety =

sales – break-even level of output

months to break even =

break-even units/units produced per month

example of one

Break- Even chart

Area of profit

This zone shows the amount of profit made by the business

Margin of safety

This is the number or value of the units sold above the break-even point. The gap between the margin of safety and the break-even point shows how far sales could fall before they would affect the business’s ability to pay its bills.

Area of loss

This zone shows the loss made by the business

Fixed costs

Determine where the total costs line starts

Using Break-Even

Break-even is a valuable management tool used by businesses to plan, monitor, control and set targets. As part of break-even, contribution per unit has both limitations and benefits.

Planning

break-even helps the business to work out how many items it needs to sell over a certain period to cover its costs and to use this information to set a price that will enable it to make a profit

Monitoring

break-even alerts the business to potential problems, e.g. increased fixed or variable costs or a fall in sales, allowing it to take steps to fix them in good time

Control

break-even can be used to identify where costs are increasing, allowing the business to take action to control this.

Target -Setting

Break-even helps a business to set targets for sales, unit costs, contribution, and profit.

Contribution benefits

A business is able to see whether the products it produces actually cover its own variable costs.

This is used to set the price of the product in relation to direct production costs.

Contribution per unit may be very low, so the business will need to sell a large number to cover the fixed costs.

Contribution limitations

Contribution per unit on certain products may be extremely high.

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In each case the contribution per unit is distorted and may not be valuable.

Variable costs

The variable costs relate to the additional costs incurred per unit

Total Costs

Total costs are the total of these two figures.

Total Revenue

is calculated by multiplying the number of units sold by the price the business received for them.

selling price

if the selling price is increased total revenue will be greater and rise more quickly. If it falls then total revenue will drop

Fixed costs

total costs will increase if fixed costs increase

Variable costs

these will affect the total costs line, shifting it up if unit costs increase and down if they fall.

Break-even may have to be recalculated when there is a change in…

Selling price, fixed costs, variable costs.

Stages necessary to work out break-even

The variable costs, to Total costs, to Total Revenue.