1. 3.3 Break-even Analysis

2. Key Learning Outcomes:
Distinguish between contribution per unit and total contribution
Draw a break-even chart and calculate the break-even quantity, profit, and margin of safety
Calculate target profit output, target profit and target price
Analyse the effects of changes in price or cost on break-even quantity, profit, and margin of safety, using graphical and quantitative methods
Examine the benefits and limitations of break-even analysis

3. Contribution
Contribution per unit = price per unit – variable cost per unit
Total contribution = total revenue – total variable cost
Total contribution can also be expressed = contribution per unit x number of units sold
Profit = total contribution – total fixed costs

4. Calculating the “BREAK EVEN POINT”
See page in your textbook

5. Calculating the “MARGIN OF SAFETY”
See page 181 in your textbook
Margin of Safety = current output – breakeven output

6. Practice Problem: Student workpoint 3.7, page 182 in your textbook.
Complete the table, and answer the 4 practice exam questions—we will discuss your work IN CLASS TOMORROW.

7. Breakeven Analysis: Benefits Limitations
Charts provide an easy and visual means of analyzing a firm’s financial position at various levels of output.
At a glance, management is able to determine the profit, loss, margin of safety, break-even quantity and break-even revenue
Formula Driven (accurate?)
Changes in price and costs can be easily compared.
Can be used as a strategic decision making tool
Assumes that all the output produced by firms is sold with no possibility of stocks being built up or held
Assumes that all prices and costs are linear, and not “wavy”
Semi-variable costs are not accounted for
Fixed costs may change at different level of activity—the lines might need to be more “stepped” rather than straight