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Fixed and Variable Costs in Break-Even Analysis (Break-Even (Contribution…
Fixed and Variable Costs in Break-Even Analysis
Fixed Costs
costs that are not directly affected by changes in the level of activity
e.g. the cost of insurance or rent
will stay the same whether 0 or 1000 units are produced
Variable Costs
vary directly with changes in the level of activity
e.g. raw materials will cost £0 if the company produces 0 output
if the company produces 1000 units, and it costs £5 per unit, then raw materials will cost £5000
Definitions
Break Even Point
the point at which the company neither makes a profit or a loss
Contribution
the amount by which the sales value of a product exceeds its variable cost
Break-Even
Total Costs = total fixed costs + total variable costs
Profit = selling price - total costs
Contribution = sales - total variable costs
helps to decide on the price of a product/service
have to ensure selling price covers costs involved and delivers a profit
BEP (units) = total fixed costs/contribution per unit
BEP (£) = BEP (units) x selling price