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BREAK-EVEN

ANALYSIS


INTRODUCTION

Every business manager should want to know how many products need to be sold or services
provided to cover the total costs of the business. That is they need to know what it takes to break
even.

If a business cannot break-even then decisions need to be made to correct the situation.

Because break-even is the point where total costs equal total revenue, anything sold above the
break-even point results in a profit being made; while anything sold below break-even point
results in a loss for the business.

TOTAL COSTS

Total costs are made up of two main types of costs. These are:

- Fixed costs
- Variable costs

Fixed Costs

Fixed costs are so called because they do not vary with the level of activity or output within a
given range e.g. For rent or land rates, it does not matter if you sell or produce no products or
whether you sell or produce a number of products, you still pay the same amount.

Variable Costs

Variable costs are so called because they vary in proportion to the level of activity or output. If
output doubles, so does the variable cost i.e. direct labour and direct materials


BREAK-EVEN POINT

To calculate the break-even in units arithmetically, we use the formula:

Break-even (units) =

Fixed Costs




Contribution Margin/unit

Where:
Contribution Margin/unit =
Selling price (per unit) - Cost Price (per unit)

To calculate the break-even in dollars we multiply the break-even units by the unit selling
price.




CHANGES IN FIXED COSTS

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Any changes in fixed costs would cause the break-even point to change.
If fixed costs decreased the break-even point would drop. If fixed costs increased then the
break-even point would rise





PROFIT AND LOSS CALCULATION

As noted earlier, because break-even is the point where total costs equal total revenue,
anything sold above the break-even point results in a profit being made; and anything sold
below break-even point results in a loss.

To calculate whether a profit or loss is made we can use the following formula:

(Sale units - break-even units) contribution margin per unit

Note:
If we have a negative result we have made a loss. If we have a positive result we
have made a profit

Thus, anything above break-even the margin contributes to the profit of the
business by the amount of the contribution margin per unit; and anything below
break-even contributes to a loss by the contribution margin per unit.


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