Finance · Higher
Break-even Analysis in Depth
Break-even analysis helps managers see how many units they must sell before making a profit.
Core calculations
Contribution per unit = selling price − variable cost per unit
Break-even output = fixed costs ÷ contribution per unit
Margin of safety = actual (or budgeted) output − break-even output
Using the analysis
Managers can test “what if” changes to price, costs or volume.
Limitations: assumes linear costs/revenue, constant mix, and that all output is sold.
Worked example
FC £12,000; price £10; VC £4. Break-even and margin of safety if sales are 3,000 units?
Solution: Contribution £6; BE = 2,000 units; MoS = 1,000 units.
Practice questions
1. Contribution formula?
2. One limitation of break-even analysis?