Break Even

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  • Break Even
    • Calculating contribution and break even output is an important analytical method that is used in every type of business- large and small
    • Used in business as a tool to make decisions about the future
    • Contribution
      • The difference between sales and variable costs of production
      • Used in calculating how many items need to be sold to cover all the business' total costs (break even)
      • The money 'contributes' towards fixed costs and profit
      • Contribution per unit= selling price per unit - variable costs per unit
      • Contribution= total sales - total variable costs
      • Total contribution= contribution per unit x number of units sold
      • Profit= contribution less fixed costs
    • Break Even: An Introduction
      • If a business has information about fixed costs and variable costs and knows what price it is going to charge, it can calculate how many units it needs to sell to cover all of it's costs
      • The point where total costs (fixed costs+variable costs) are exactly the same as total revenue is called the break even point
      • The business makes neither a profit nor a loss
      • It is the point at which the business makes just enough revenue to cover their costs
    • Break Even Output
      • There are three methods of calculating break even output
      • A table: (or spreadsheet)
        • Showing sales and costs over different levels of output
      • A formula
        • which you can use to calculate break even output
      • A graph
        • which charts sales and costs
    • Break even analysis: key assumptions
      • Selling price per unit is the same, regardless of the amount produced
      • Variable costs vary in direct proportion to output- i.e. variable costs per unit is the same
      • All output is sold
      • Fixed costs do not vary with output- they stay the same
      • These assumptions are not always realistic- a key limitation to break even analysis
    • Margin of Safety
      • The difference between actual output and the break even output
      • Margin of safety= actual output-break even output


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