Break-even and Contribution Analysis

Flashcards covering key concepts related to contribution, break-even analysis, and its implications for business revenue and costs.

Contribution

The revenue a business receives from sales minus the variable cost of the product.

Break-even point

The point at which total revenue equals total costs, meaning no profit or loss.

Fixed costs

Costs that do not change regardless of the number of units sold.

Variable costs

Costs that vary with the level of output or sales.

Margin of safety

The difference between the actual sales and the break-even sales, indicating risk of loss.

Contribution per unit

The amount that each unit sold contributes towards covering fixed costs, calculated as selling price minus variable cost.

Break-even calculation formula

Fixed costs divided by contribution per unit determines the break-even point in units.

Effect of selling price increase on break-even point

An increase in selling price raises contribution margin, requiring fewer units to break even.

Effect of variable costs increase on break-even point

An increase in variable costs lowers contribution margin, requiring more units to break even.

Effect of fixed costs increase on break-even point

An increase in fixed costs requires more units to be sold to cover the higher costs and break even.

Scenario analysis

Using break-even analysis to explore the impact of changes in revenue, fixed costs, and variable costs on business outcomes.