Unit 5, Section 5: Break-Even Analysis

Break-even

This condition exists when a firm's sales revenues cover all of its production costs.

break-even analysis

This is a business management tool used to determine the level of sales volume needed to cover all the costs associated with the output of a particular good or service.

Break-even chart

This is a graphical illustration of an organization's production costs, sales revenues, and profits (or loss) at given levels of output.

break-even point

This is the point on a break-even chart where the firm's total costs equal its total revenue, shown by the intersection of the TR and TC curves.

Break-even quantity (BEQ)

Also known as assisted areas, these are geographical areas that receive direct government financial assistance for economic regeneration and development.The quantity of sales (sales volume) required for a firm to reach break-even. It is found by using the formula: = Fixed costs / (Price - Average variable cost).

Break even revenue

This is the value of the output needed to break-even.

contribution

This refers to the financial difference between a firm's selling price and its direct or variable costs.

Contribution per unit

This is the difference between a firm's selling price and its average variable costs (AVC) of production, i.e., P - AVC.

loss

This occurs when a firm's total costs are greater than its total revenues, i.e. the business is unprofitable.

Margin of Safety

the numerical difference between a firm's volume of sales and its break-even quantity.

profit

The financial surplus that remains when a firm's total costs (TC) of production are deducted from its total sales revenues (TR).

target price

This is the amount customers need to pay per unit in order for the firm to break-even or to reach a particular target profit

Target Profit

This is the amount of profit that a firm aims to earn within a given time period.

Target profit output

the quantity of sales required to reach the firm's target profit.

Total contribution

This refers to the total difference between a firm's sales revenues and its total variable costs (TVC), i.e. (P - AVC) × Q. The difference is then the total amount that contributes to paying a firm's fixed costs.