Break Even

Break even

when a business sells enough goods/services to cover all its costs of production. this is the output level where a business is not making a profit or a loss

Contribution per unit

It represents the amount each unit contributes toward covering fixed costs and generating profit after accounting for variable costs.

contribution

The amount of money that remains after all variable costs have been subtracted from the sales revenue

break even quantity

amount of sales/otuput required to break even

margin of safety

Difference between firm’s current sales quantity & BEQ

• Positive margin means firm is making a profit

target profit

the desired/ expected profit from a business that can be determined from a break-even chart by comparing the TC & TR curves at each level of output

target profit quantity

sales volume (quantity) needed in order to reach a firms target profit

target price

the amount charged to customers in order to reach break even or desired target profit

limitations of break even analysis

• assumes that costs and rev are static (unchanigng conditions in the market) while actually factora like inflation and intrest rates can affect the forecast

• prices and costs are assumed to be constant so tr& tc lines are liner. Realisticly, firms get economeis and diseconomies of scale as output increases and give discounts to customers buying in bulk

• some costs are difficult to identify as fixed or varibale

• a business sells a range of products all having different total fixed costs etc so it may not be usueful for a multi product business

• effectiveness of the model depends on the accuracy of data used.

formula for cont per unit

selling price - avc

formula for beq

fc/ cont per unit

effect of changes in price or cost

formula for mos

current output - BEQ

formula for total contribution

cont per unit x output

formula for profit at a certain output level

(output x cont PU) - FC

total rev

P x Q

total cost

TFC + TVC

target profit quanitiy formula

FC + Target Profit/ (Price - VC)

break even anlaysis

a financial tool used to determine the level of output or sales a business needs to cover its total costs (both fixed and variable). It helps businesses identify the point at which total revenue equals total costs, meaning there is neither profit nor loss.