BEO

• Contribution

  • Contribution looks at the profit made on individual products

  • It is used in calculating how many items need to be sold to cover all the business' total costs (variable and fixed)

  • Contribution is the difference between sales and variable costs of production
• BEO calculations

  Contribution = total sales - total variable costs

  Contribution per unit = selling price per unit - variable costs per unit

  Total contribution = Contribution per unit x number of units sold

  Profit = Contribution - Fixed Costs
• Break-even Output

  The breakeven point (breakeven output) happens when total sales = total costs.
• key issues with beo

  • At what level of production (output) does break-even take place?

  • What is the effect on break-even of changes in the business?

  • What business decisions can be taken which affect break-even and which will help improve profits?
• some important assumptions for beo

  • Selling price per unit stays the same, regardless of the amount produced

  • Variable costs vary in direct proportion to output – i.e. variable cost per unit is the same

  • All output is sold

  • Fixed costs do not vary with output – they stay the same
• Strengths of Breakeven Analysis

  Focuses on what output is required before a business reaches profitability

  Helps management & finance-providers better understand the viability and risk of a business or business idea

  Margin of safety calculation shows how much a sales forecast can prove over-optimistic before losses are incurred

  Illustrates the importance of keeping fixed costs down to a minimum
• Limitations of Breakeven Analysis

  -Unrealistic assumptions – products are not sold at the same price at different levels of output; fixed costs do vary when output changes

  -Sales are unlikely to be the same as output – there may be some build up of stocks or wasted output too

  -Variable costs do not always stay the same.

  -Most businesses sell more than one product