Break Even Analysis
- 21st September 2013
This worksheet will help you develop your understanding of the different kinds of costs
incurred by a business and how contribution and breakeven analysis can help a
Key terms used in this worksheet
Contribution per unit = selling price – variable cost
Break even output – the amount of output when revenue equals costs (zero profit or
Margin of safety – the difference between expected sales and break even level of sales
Each sale made contributes an amount to covering the fixed costs the business has to
pay for that time period.
For example, a business may have fixed costs of £1,000 for the month. If the selling
price is £5 and the variable cost is £3, then each sale contributes £2 towards paying for
that fixed cost. If no sales were made then the business would still have to pay the fixed
The break-even output can be calculated by using contribution per unit:
Total fixed costs divided by contribution per unit
Example from above: £1,000 divided by £2 = 500 units of sales
Any sales over and above the break even output means a contribution to the profit.
Total contribution is the contribution per unit x the total sales.