Summary Break-Even

Theme 2 Topic 10
Break-Even
Break-Even Analysis
Break-Even – when the total revenue is equal to total costs so neither a profit nor loss is made

Break-Even Point – the number of products the business needs to sell so total revenue equals total costs

Break-Even Chart

The break-even point is where the total revenue line crosses the
total costs line

Lines on a break-even graph:

 Fixed costs – horizontal line as fixed costs don’t vary with
output
 Variable costs – increase with output
 Total costs – addition of fixed and variable costs
 Total revenue – price x quantity sold

Break-Even Formula

Break-Even Output = Total Fixed Costs
Contribution Per Unit

Contribution Per Unit = Price Per Unit – Variable Costs Per Unit

 Looks at how much the sale of one product contributes towards paying off the fixed costs

Total Contribution = Total Revenue – Total Variable Costs

OR

Total Contribution = Unit Contribution x Total Number Sold

 Looks at how much the sale of all the businesses products contributes towards paying off the fixed
costs

Limitations of Break-Even Analysis

 It’s only really useful for a business that makes a single product
 Only as accurate as the data from which it is based – if costs or selling prices are incorrect, the
forecasts will be wrong
 Costs don’t rise as steadily as the technique suggests – variable costs can rise slower than output due
to the benefit of buying in bulk

Changes in Break-Even Output

How can a business reduce their break-even output?

 Reduce fixed costs
 Reduce variable costs per unit
 Increase selling price

Margin of Safety

Margin of Safety = Actual Output – Break-Even Output

 Shows how many units of sales can afford to be lost before the business starts to make a loss