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3.3 BREAK-EVEN ANALYSIS (Contribution (can be used to calculate how many…
3.3 BREAK-EVEN ANALYSIS
Contribution
can be used to calculate how many products need to be sold
Contribution per unit = price per unit - variable cost per unit
Total contribution = total revenue - total variable cost
= contibution per unit x no of units sold
contribution only removes variable cost
Pofit
Profit = total contribution - total fixed cost
profit removes variable and fixed costs
Breaking Even
Break-even point
Total costs = total revenues
Intercept of TC and TV
Break-even graph
x-axis = the no of outputs/units
y-axis = the revenues
Fixed cost(FC) is horizontal line - constant
Variable cost(VC) starts from origin - no outputs
Total costs(TC) starts with FC starting point
Total revenue(TR) starts from origin - no outputs no revenues
the left is loss whereas right is profit
Break-even revenue
Break-even revenue = fixed cost/contribution per unit x price per unit
Margin of Safety
Margin of safety = Current ouputs - Break-even outputs
Range of output where profit is made
Calculating Break-even Quantity
Using contribution per unit - Break-even quantity = fixed costs/contribution per unit
2 Using the TR= TC
Pofit = TR - TC
Profit
Target profit output
Target profit output = (fixed cost + target profit)/contribution per unit
Effect of changes in price/costs
Changes in price
Changes in costs
increase in fixed costs
increase in variable costs