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3.3 Break Even Methods (Target Profit (Efects of changes in price or costs…
3.3 Break Even Methods
Contribution
Contribution can be used in calculating how many products need to be sold in order to cover a frm's costs. It determines how much a product contributes to its fxed costs and proft after deducting the variable costs.
Contribution per unit refers to the difference between the selling price per unit and variable cost per unit:
Contribution per unit = price per unit - variable cost per unit
Total contribution is calculated when more than one unit is sold. It is found by subtracting the total variable costs from the total sales revenue:
Total contribution = total revenue - total variable cost
Total contribution = contribution per unit * number of units sold
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Breaking even
After gathering information about pricing and fixed and variable costs, a frm will need to calculate how many units or what level of output it needs to sell to cover all its costs
Margin of safety
Businesses may need to know how much output they need to produce beyond the break-even point as well as how much output or sales could fall before a loss is noted
Margin of safety = current output - break-even output
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Target Profit
Target profit output
The break-even chart can be used to determine the level of output that is needed to earn a given level of proft. Output found this way is known as target proft output and the expected proft is known as target profit
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