break-even analysis
Break-even point is where you make neither a loss nor a profit.
Break even = fixed costs / contribution per unit
Contribution = price - average variable costs
Revenue = selling price x output
Total variable costs = variable costs x output
Total costs = TVC + TFC
Margin of safety (the amount by which demand can fall before a firm incurrs a loss) = maximum output - BEP
Advantages of BE:
x axis = OUTPUT
y axis = TC/REV
Break even = fixed costs / contribution per unit
Contribution = price - average variable costs
Revenue = selling price x output
Total variable costs = variable costs x output
Total costs = TVC + TFC
Margin of safety (the amount by which demand can fall before a firm incurrs a loss) = maximum output - BEP
Advantages of BE:
- allows a start-up business to determine how many items need to be produced and sold before a profit can be made
- shows the different levels of profit arising from the various levels of output and sales that might be included
- allow a company to conduct "what if?" analyses, investigating the impact on BE and profit of changes in the selling price, the variable cost per unit and the fixed costs
- can be adapted to discover at which point a company can reach a particular profit level - investigates contribution needed to pay both the fixed costs and the target profit figure
x axis = OUTPUT
y axis = TC/REV