Business & ManagementIB

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...
Determining the break-even point

Using the TR = TC rule

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

Total variable cost = Average variable cost × Quantity         Total revenue = Price × Quantity

Using the contribution per unit rule

The quickest method

Break-even =  Fixedcosts Contributionperunit

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?

Q= FixedCosts+TargetProfit Contributionperunit

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

Break-even price =  TotalCost Output

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

Price= Profit Target + Total Cost Output

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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