# Determining the break-even point

Determining the break-even point...The formula for break-even analysis is as follows: Break-Even Quantity = Fixed Costs / (Sales Price per Unit – Variable Cost Per Unit) where: 1. Fixed Costsare costs that do not change with varying output (e.g., salary, rent, building...

#### Using the TR = TC rule

The break even quantity can be calculated by comparing total sales revenue with total costs. Therefore:

#### Using the contribution per unit rule

The quickest method

#### Interpretation of a break-even chart

Look at a chart and estimate the level of break-even.

Other uses of break-even charts include:

Target profit: how many units of output need to be produced to generate a certain level of profit?

$\text{Q}\text{\hspace{0.17em}}\text{=}\text{\hspace{0.17em}}\frac{\text{Fixed}\text{\hspace{0.17em}}\text{Costs}\text{\hspace{0.17em}}\text{+}\text{\hspace{0.17em}}\text{Target}\text{\hspace{0.17em}}\text{Profit}}{\text{Contribution}\text{\hspace{0.17em}}\text{per}\text{\hspace{0.17em}}\text{unit}}$

Break-even price: how much do we need to charge for out product in order to break-even?

Price needed to reach a target profit: what price does a business need to charge in order to reach a target rate of profit?

#### Margin of safety

The margin of safety is the range of output between the break-even output and the current level of output (assuming this level of output is above the break-even point), over which profit is made. Business would want to calculate their margin of safety in order to know by how much sales could fall before a loss is made. Naturally, the larger the margin of safety the better. We calculate it by subtracting the break-even output from the current level of output.

Margin of safety = Current level of output − Break-even output

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