BREAK EVEN ANALYSIS  We use the breakeven analysis to look at the point where we start to make a profit in the business.  Any business wants to make a profit on their investment of time and money  It is also a useful planning tool  Breakeven point is the point at which the net profit on the income statement equals zero.

Calculating Breakeven  Three methods  1. cost-volume-profit analysis  2. contribution analysis  3. sensitivity analysis

Cost –volume - profit analysis: Three key parts are: fixed costs (operating expenses) fixed costs (operating expenses) volume (break-even point in units) volume (break-even point in units) profit (selling price minus profit (selling price minus variable cost per unit.) variable cost per unit.)

Contribution Analysis  Calculating breakeven requires determining how many contributions (selling price per unit minus variable costs per unit) are necessary to cover, or pay for, the product’s expected annualized operating costs (fixed costs)

Sensitivity Analysis  Marketing manager changes one of the input variables to see what difference the change makes o break even volume  It shows how sensitive break even is to changes in the numbers used to calculate it.

Breakeven Point  Occurs when sales equals expenses or costs  Costs are either fixed or variable  Variable costs tend to vary directly with the number of units made or sold  Fixed costs tend to be relatively constant no matter how many units are made or sold

Unit Contribution  Unit contribution is the amount of money remaining after the variable costs of producing or purchasing one unit is subtracted from the selling price of one unit: Selling price per unit – variable costs per unit = unit contribution

Total Contribution  Total contribution is determined by multiplying unit contributions times the number of units sold. Unit contribution X Number of units sold = Total contribution  For retailers, unit contributions is also referred to as markup or gross margin.

Formula Break even Totals fixed costs Point = (in units) selling price/ - variable costs/ unit unit unit unit