Break-even Point

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Break-even Point

Break-even: the point at which neither a profit nor a loss is made

Break-even in units of output: fixed costs (£) / contribution per unit (£)

To use break-even, we need to know: selling price (per unit), costs of the product (variable costs per unit and overhead costs and whether they are fixed or variable), limitations such as max production capacity and max sales

Calculation method: quick to use and can see the effect of diffferent cost structures on break-even point

Table method: shows the amount of fixed and variable costs, sales revenue and profit at different levels of production

Graph method: for making presentations as it shows it in a visual form the relationship between costs and sales revenue and the amount of profit/loss at different levels of production

Calculation Method

Selling price per unit - variable costs per unit = contribution per unit

Fixed costs (£) / contribution per unit (£) = break-even point in units of output

Table Method

Columns: units of output, fixed costs, variable costs, total cost, sales revenue, profit/loss

Total cost = fixed costs + variable costs

Profit/loss = sales revenue - total cost

Graph Method

Horizontal axis: units of output

Vertical axis: costs and revenues

(http://www.tutor2u.net/business/images/break_even.gif)

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