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3.3 BREAK-EVEN ANALYSIS (MARGIN OF SAFETY (Indicates how much sales could…
3.3 BREAK-EVEN ANALYSIS
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FORMULA METHOD
Total contribution
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If TC exceeds fixed cost, surplus is profit
Less than fixed cost, loss
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Contribution per unit
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NOT profit, bcos fixed costs have not yet been covered
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GRAPHICAL METHOD
contains these infos
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Fixed Costs
not vary with the level of output, must be paid whether the firm produces anything or not
MARGIN OF SAFETY
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Ex: Break-even output = 400 units
Current production = 600 units
Margin of safety = 200 units
Production in excess of break-even point = 200 units = 50%
If a firm is producing below break-even point , it is in danger (negative margin of safety)
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