Break Even Analysis

by Ben Alford

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

business.

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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

loss)

Margin of safety – the difference between expected sales and break even level of sales

Supporting notes

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

costs.

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.

 

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