T32- Break-even

• What is break-even?

  • Understanding the breakeven position is key to understanding what a business needs to operate profitably
  •  Calculating contribution and breakeven output is an important analytical method that is used in every type of business
  • However breakeven analysis makes certain assumptions, so be aware of its limitations 
• what is contribution?

  • Contribution looks at the profit made on individual products
  • It is used in calculating how many items are needed to be sold to cover all costs in a business’ total costs
  • It is the differences between sales and variable cost production
• what is the contribution formula?


  contribution = total sales - total variable costs
• what is contribution per unit formula?

  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
• breakeven level of output = fixed costs/ contribution per unit
• what is shown on a breakeven chart?

  • if the price went up what would happen to the break even point
  • if the business is just starting up what has to be the level of output to prevent a loss happening
  • what will happen to the break even point if costs are forced to rise
• What are limitations of breakeven?

  1. Unrealistic assumptions
  2. products are not sold at same price at different levels of output
  3. fixed costs vary when output changes
  4. variable costs do not always stay same
  5. you need good reliable data
• why is break even analysis an aid?

  • Focuses on what the output is required before a business reaches profitability
  • Helps management and finance providers better understand the viability and risk of a business
  • Illustrates the importance of keeping fixed costs down to a minimum
  • Calculations are quick and easy