Revision Notes
Break-even Analysis
Total costs = variable costs + fixed costs
Key formula: break-even = Fixed costs/Unit contribution
Unit contribution = selling price - variable costs
Direct costs (variable) are costs directly linked with a
product or process e.g. Labour, materials
Indirect costs = not related directly to one process/product.
Example: overheads.
When drawing the chart do all calculations first - in case
the graph is wrong!
Draw in sales revenue first - so you don't run out of graph
paper!
Make sure you know where profit, loss, margin of safety all
are
Limitations of break-even: refers to ONE product only;
assumes you can pit costs into fixed or variable (telephone
bill?); ignores economies of scale; assumes that price does not
change (discounts?); assumes fixed costs stay fixed; ignored
external environment.
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