Note:
Total contribution = Total revenue – Total variable cost
Contribution per unit = Price per unit – Variable cost per unit
Break-even analysis
BEQ is quantity when all are equal
Break-even point
Intersection of Total Cost and Total Revenue in a Break Even Chart
Margin of safety
Shows how much demand exceeds or fails to exceed BEQ
Sales volume (Projected Demand) – BEQ
Evaluate degree of risk based on demand for a product
Can be expressed as a percentage of demand
Target profit and revenue
Can be used to calculate level of sales needed to attain a certain profit
Ignores other factors that affect profit:
Different pricing throughout time
Level of demand is subject to change
Profit depends on risk
Innovation and luck – prediction aren’t always followed
Must consider:
Pricing strategies (penetration pricing, market skimming, etc.)
Price elasticity
Break-even is when total costs equal total revenue
Helps to tell whether a good can be financially worthwhile and the level of profit a business is likely to earn
Break-even quantity
Minimum level of sales before the firm could break even
When Total revenue  = Total fixed cost + [Total variable cost x Quantity]
Break-even chart
Title : Break Even Analysis for Company XYZ
Label Axes:
X-axis is output
Y-axis is Revenue/Cost (label currency as well)
Determine max. output and mark it, as well as revenue from this level of output
If maximum isn’t given, make it twice the BEQ
Determine BEQ and draw a vertical line at that point
Mark the revenue gained from this quantity on the line (Break Even Point)
Draw Total Fixed Cost line
Draw Total Cost line
starts at TFC at x=0, intersects the BEP
Draw Total Revenue line
starts at (0,0), intersects BEP
Limitations
Makes several assumptions:
Fixed costs must be paid regardless of output
Variable cost increases linearly
Ignores economies of scale
Sales revenue increases linearly
Ignores discounts for large orders and price discrimination
Assumes only one product is sold
Every unit of output is sold
Selling price is constant regardless of units sold
Provides a static model (e.g. production costs can change)
Depends on reliability of data
Other factors can have an effect (e.g. competitors, staff motivation)
Only suitable for single product firms
Kim De Leon 3.3. Break-even Analysis 10.03.2015
Comments 2
It isn’t Total revenue = Total fixed cost + [Total variable cost x Quantity]
that’s for total cost
Author
Hi, you’re right, but in the context of the page, we mean break-even quantity is when “Total revenue = Total fixed cost + [Total variable cost x Quantity]”. We understand the confusion, so we’ll edit it a bit. Thanks!