Break even

• what is contribution?


  the amount of money each unit sold contributes towards fixed costs and once break even has been achieved then contributes towards profit.
• what is the break even point?


  The point at which total revenue equals total costs. the business makes neither profit or loss at this point.
• what is the margin of safety?


  The difference between the actual or expected sales and the break-even point.
• what graph is this?

  a break even graph

  
• advantages of break even?

  • tells what sales are required
  • understand the viability of the business
  • understand the levels of risk
  • calculations are quick and easy
  • a business can see if a change being made will affect profit and in what way
  • can look at worse and best case scenarios
  • allows an entrprenuer to set goals accordingly
• disadvantages of break even?

  • may be unrealistic
  • most businesses sell more than one product which makes it harder to calculate
  • sales are unlikely to equal the exact output
  • assumptions will be made
  • economies of scale can change costs
• what is the equation for contribution per unit?


  selling price - variable costs
• what is the equation for break even point?


  fixed costs/contribution per unit
• what is the equation for margin of saftey?


  actual output - break even output
• what is the equation for profit that includes contribution?


  profit = total contribution - fixed costs
• what is the equation for profit that includes margin of safety?


  profit = margin of safety * contribution per unit.