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Break-even

The point at which neither profit nor a loss is made ie when total revenue equals total costs. Break-even output is the output in terms of quantity required to be produced (and sold) in order to break-even ie to ensure the total revenue received from the output, (if sold), will cover all costs. Data on costs and selling price is essential in calculating the break-even point. A business first needs to classify its costs into fixed costs, and variable (or direct) costs. See fixed costs and variable costs. Together with data on selling price, the break-even point can then be calculated by dividing Total Fixed Costs with the Unit contribution (ie Unit selling price – Unit variable (direct) cost. See also contribution, contribution per unit. Example: Fixed costs of ‘Rainy Day Umbrellas’ (RDU) = £10,000. Selling price per umbrella = £4. Variable cost per umbrella = £1.50. Contribution per unit (towards fixed costs) = £2.50. Based on the above costs and selling price, 4,000 umbrellas is the break-even level of output. Break-even can also be calculated in monetary terms, by multiplying fixed costs by the selling price and dividing the resultant figure by contribution per unit. This does not tell us how many units must be sold, but tells us what level of sales revenue is needed to break even. For RDU this would be £16,000. This formula is especially useful when a business’s produce / service is not standardised, as it can help to determine the minimum selling price required for a particular product / service in order to break-even and make a profit.

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