Break+Even+Analysis(1)

# Break+Even+Analysis(1) - real business as most firms...

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Break Even Analysis Break-even can also be calculated by using a formula, as discussed at the end of last lesson. The equation  is: Fixed Cost Selling Price – Variable Cost per Unit The bottom line of this equation gives us a figure called contribution. Contribution is defined as: Contribution = Selling Price – Variable Cost per Unit The equation may also be written as: Fixed Costs Contribution Therefore the contribution is simply the contribution made by the sale of each product to fixed costs. Once  all of the fixed costs have been paid this contribution then becomes profit. Product Ranges and Individual Products Thus far we have assumed that the break-even point is calculated for a whole business which only produces  one product (selling price and variable costs are always the same). This is however not representative of

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Unformatted text preview: real business as most firms produce and sell more than one product. Therefore business may use break-even analysis to estimate the break-even point for an individual product or product range. This would appear an easy exercise, each product has its own selling price and we can work out the variable costs for each unit. Can you think of any problems with fixed costs? Activity – A business produces and sells washing machines. For each machine their variable costs are £200 and their selling price is £300. Their total fixed costs for the period are £10,000. How many units must the business sell to break-even? Now assume that because of a reduction in interest rates your fixed costs have dropped to £9,500....
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## This note was uploaded on 05/15/2010 for the course ACCOUNTING B97702031 taught by Professor Lyz during the Spring '09 term at Punjab Engineering College.

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Break+Even+Analysis(1) - real business as most firms...

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