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

    Cost and revenue data for sale of hamburgers

  • The graphical method - the break-even chart

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

    A break-even chart showing the safety margin

  • 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