Break-even analysis and contribution

Learning objectives

Calculate contribution per unit and total contribution and explain precisely how contribution differs from profit

Calculate the break-even quantity from fixed costs, selling price and variable cost per unit, and calculate the output needed to reach a target level of profit

Construct a break-even chart to scale, labelling the total revenue line, the total cost line, the fixed cost line, the break-even point, the margin of safety and the areas of profit and loss

Calculate the margin of safety and interpret what it says about the firm's exposure to a fall in demand

Analyse the effect on the break-even point of a change in price, in variable cost per unit or in fixed costs, and show that change on the chart

Discuss the assumptions and limitations of break-even analysis, including the assumption that every unit produced is sold at one price