3.3 Break-even analysis

Introduction

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

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Calculating break-even - methods

  • The table method

 Cost and revenue data for sale of hamburgers

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  • The graphical method - the break-even chart

 

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

 A break-even chart showing the safety margin

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  • The break-even formula   * Contribution per unit: selling price of a product minus direct costs per unit.   * Total contribution: unit contribution x output.

 

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Calculating output to achieve target profit

 

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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.

 

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Calculating target price

 

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