3.3 Break-even analysis

Introduction

• Break-even: level of output at which total costs equal total revenue.

Calculating break-even - methods

• The table method

  

• The graphical method - the break-even chart

  

• Margin of safety: amount by which the output level exceeds the break-even level of output.

  

• The break-even formula

  • Contribution per unit: selling price of a product minus direct costs per unit.
  • Total contribution: unit contribution x output.

  

Calculating output to achieve target profit

Calculating target break-even revenue

• Break-even revenue: amount of revenue needed to cover both fixed and variable costs so that the business breaks even.

  

Calculating target price