Break-even

Important definitions:
 Break-even is when total revenue and total cost of a business
are equal. Graphically, this is when both lines intersect.
• Any point before the break-even point indicates a loss, whereas,
any point after shows a profit.

 Contribution: this shows how much the difference

between SP&VC contribute to the FCs. There will come
a point when all the FC are covered, the difference
between SP & VC will then
 contributes to making a profit.
 Total contribution = Total revenue – Total variable cost
 Profit= total contribution-FC
 Contribution per unit = Price per unit – Variable cost per unit
Margin of Safety-MOS
 Shows how much the units produced
or sold exceed or fail to exceed BEQ.
 MOS can be negative; this means that
the business does not reach break-
even and is in a loss-making position.

 MOS=current production Quantity-

BEQ
To draw, let’s walk across the
example on slide 6 using the
Visible Thinking Routine:
Think-puzzle, explore :
Think, Puzzle,
Explore
• Company ABC produces 800,000 units of a certain product
annually. The overhead costs amount to $80,000 annually. The
product is sold for $20 per unit and the variable costs $10 per unit.

• A. Define the terms:

• break-even quantity.

• Overhead costs.

• B. calculate the break-even quantity.

• C. Draw a fully labelled break-even chart.

• D. Calculate the margin of safety and profit at:

• i. Full capacity.

• ii. Quantity= 100,000

• Iii. Quantity= 80,000

• Iii. Quantity= 60,000

Formulas we need to solve the question:

Contribution/unit= Selling price- variable cost

MOS=current production Quantity-BEQ

Profit= MOS X contribution/unit

or:
total contribution-FC
Draw students'
attention to: Quantity Fixed Total Total Total
cost variable cost revenue
cost

• How MOS and profit change when the

quantity produced changes.
0
BEQ
• Drawing a table would help the students
in constructing the graph 2XBEQ or
full
• The quantities are suggested to guide capacity
accurate drawing of the graph.
 Limitations of break-even:
 Makes several assumptions:
1. Fixed costs are fixed for a long time; however, they are subject to
change. They also must be paid regardless of the level of output.
2. Assumes that all the units produced are sold, this is not always true in
reality.
3. Assumes that costs & revenues are linear, however, they are subject to
non-linearity.
4. The model may not be useful in a changing dynamic world.
5. Ignores discounts for large orders and price discrimination
6. It’s only suitable for single product businesses.
7. Its accuracy depends on the reliability of the collected data.
With reference to the same
example on slide 6, use the
thinking routine below to
figure out the following:

• If the selling price changes to become $30/unit, how does this impact
the break-even quantity, MOS and profit?
• In another example, what is the impact of an increase in the total cost on
the break-even quantity, MOS and profit?
 Don’t forget to work
on the target profit
output formula:

• Target profit output=(FC+TP)/Contribution per unit

Remain in your
groups using
Circle of
viewpoints and
with reference to
the example on
slide six:
If the target profit is
$25,000, calculate the
target profit output?

If the target profit

output is 120,000,
calculate the price the
company must charge?