2.4 Contribution & break-even analysis

Contribution

• The giving or supplying as a part or share of the total.
• Contribution per unit = Price – Average Variable Cost

Profit formula

• Profit = Quantity x Price - (Fixed Costs + (Average Variable Cost x Quantity))

Break-even analysis

• It is where profit = 0, meaning the revenue covers the costs.
• Step by step to calculate and graph the break-even chart:
1. Write profit equation = 0 ; 0 = Quantity x Price - (Fixed Costs + (Average Variable Cost x Quantity))
2. Rearrange equation to find the unknown Quantity (the values will be given in question).
3. After quantity value is found, calculate Quantity x Price to find the revenue.
4. Plot a graph with Quantity in the x-axis and Revenue in the y-axis.
5. Mark the break-even point (point with the Quantity and Revenue values that you calculated in step 2 and 3).
6. Draw a line from 0,0 that passes through the break-even point and continue it until the end of the graph's axes.
7. Draw the fixed cost curve (straight horizontal line with the value of fixed cost given in question).
8. Draw total cost line starting at the fixed cost line and passing through the break-even point, and continue it until the end of the chart's axes.
9. Write a title for the chart; e.g. break-even analysis for ____ at date ______.
10. Remember to label the axes of the graph.
11. Remember to label each line of the graph and the break-even point.
• it should look like this:

Margin of safety

• The difference between current/forecasted sales and the quantity of sales at breakeven point.
• output – breakeven point quantity.