2.2.3 Break-even

What is the contribution per unit formula?

Contribution per unit = Selling price - Variable cost per unit

What does contribution per unit tell a business?

It’s how much money is left over from selling ONE product after paying the costs to make it (your variable cost). This money then goes to your fixed costs!!!

What is total contribution?

It’s the total money a business makes (after variable costs) to help pay fixed costs and make profit

What is the formula for total contribution

Contribution per unit x quantity

Define break even point

Total revenue earned for a product is exactly equal to its total costs and where the business is making neither a profit nor a loss

What is the break-even point formula?

Break-even output = Fixed costs ÷ Contribution per unit

What does the margin of safety show?

The number of units a business is currently selling above its break-even point.
It shows how much sales can fall before the business starts making a loss.

What is the margin of safety formula?

Margin of Safety = Actual output - Break-even output

Benefits and drawbacks of break even analysis

BENEFITS

+ Easy to understand – Simple to calculate and visually shows when a business starts making profit.

+ Aids decision-making – Useful when deciding on pricing, costs, or launching a new product.

+ Identifies risk – Shows how far sales can fall before a loss is made (margin of safety).

+ Useful for financial planning – Can be shown to banks/investors to justify funding.

+ Helps set sales targets – Shows exactly how many units need to be sold to break even.

DRAWBACKS

- Assumes all output is sold – Doesn’t account for unsold stock or waste.

- Costs and prices can change – Break-even is based on estimates, which might be inaccurate.

- Oversimplified – Doesn’t consider changes in variable costs, economies of scale, or external factors.

- Not suitable for multi-product businesses – It’s harder to apply if the business sells lots of different items.

- Doesn’t consider quality or customer demand – Just because you can break even doesn’t mean customers will want your product.