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3.3 Break-Even PDF

The document explains break-even analysis, detailing how to calculate contribution per unit, total contribution, and profit. It describes break-even charts that illustrate the relationship between costs, revenues, and sales, indicating the sales level needed to avoid loss. Additionally, it introduces the concept of margin of safety, which measures the difference between actual output and break-even output, highlighting the importance of maintaining a positive margin for profitability.

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19 views1 page

3.3 Break-Even PDF

The document explains break-even analysis, detailing how to calculate contribution per unit, total contribution, and profit. It describes break-even charts that illustrate the relationship between costs, revenues, and sales, indicating the sales level needed to avoid loss. Additionally, it introduces the concept of margin of safety, which measures the difference between actual output and break-even output, highlighting the importance of maintaining a positive margin for profitability.

Uploaded by

liu.xiaoya
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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3.

3 Break-even Analysis
Contribution per unit = selling price per unit – variable cost per unit
Total contribution = total revenue – total variable cost = contribution per unit × no. of units sold
Profit = total contribution – total fixed costs = sales revenue – total variable costs – total fixed costs

Break-even charts are graphs that show how costs and revenues of a business change with a change in sales. They show
the level of sales the business must make in order to break even.
Output = 0 units Output = 2000 units (max.) Breakeven point is that
Fixed costs are all costs that do not level of output where
$5000 $5000
change with the change in output. sales revenue is equal to
Variable costs are all costs that total cost, where there is
$0 $3*2000 = $6000
change with the change in output. no profit or loss.
Total costs (FC+VC) $5000 $11000 unable to reach = loss
Revenue: income from sales of G&S output in excess = profit
$0 $8*2000 = $16000
(price*quantity of output sold)

Methods to find the break-even point


The calculation method
3*0$) +14#- /*505
!"#$%#&#' )#&#) *+ ,"*-./01*' =
6*'0"17.01*' ,#" .'10
6*'0"17.01*' ,#" .'10 = 8#))1'9 ,"1/# ,#" .'10 − &$"1$7)# /*50 ,#" .'10 à Helps to cover FC of the business

Drawing a breakeven chart


Margin of safety is a measure of the
difference between the break-even level
of output and the actual (current) level
of output. It is the range of output over
which profit is made.

= current output – breakeven output

The greater the difference, the safer the


firm will be in its profit earnings.

As the MOS is a positive value, this is a


favourable position for the firm.

Producing below break-even point à


negative MOS & making a loss

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