5.4 Breakeven

• Break-Even


  • How many units need to be sold to cover the costs (not making a profit or a loss)

  [ $BREAK\ EVEN\ =$$\ \frac{FIXED\ COSTS}{CONTRIBUTION}$]

  ( CONTRIBUTION = SELLING PRICE - VARIABLE COST PER UNIT )
• Limitations of Break-Even Analysis


  • Costs and revenues do not always increase in direct proportion to units sold
  • Cost data is often an estimate
  • It is less useful when a business sells more than one product
  • Some output may remain unsold
  • Break-even charts can be difficult to amend
• Margin of safety = sales output - breakeven output
• The Benefits of Break-Even Analysis


  • Identify the level of sales required to avoid losses
  • Identifying fixed and variable costs - impact on business
  • Helps for setting prices which generate sufficient revenue
  • Target setting - such as realistic sales targets and plans for necessary expenses
  • Assess financial health, track progress and determine required changes