Break-even Analysis

• • Break-even is the point at which total revenue equals total costs so the business is making neither a profit nor a loss, TR = TC.
• • Contribution is the amount that each unit produced "contributes" towards the fixed costs of the business.
• • Fixed Costs = Costs that don't vary with output. E.g. Rent or Salary
• • Variable Costs = Costs that do vary with production. E.g. Wages or Raw materials.
• • After the break-even point, your "contribution" is how much profit you make on each good sold.
• • FC/C = Break-even
  • FC is fixed costs of a business (rent)
  • C is contribution (SP - VC)
• • C = SP - VC
  • C is contribution
  • SP is selling price per item
  • VC is variable cost per item
• • The Margin of Safety calculation shows the number of sales that could be lost before the business makes a loss.
  • Margin of Safety formula: Actual sales - Break-even sales
• Break-even Diagram

  
• • Target Profit: How much output is required to make my desired profit.
  • Fixed Cost + Target Profit / Contribution per unit
  • Contribution per unit = SP - VC
• • Target Price: What price must be charged?
  • Fixed Cost / 1 - (Variable Costs/Selling Price)