3 Calculating Breakeven

Question 1

Breakeven chart

Answer 1

Breakeven is the point where total revenue (TR) = total costs (TC).

The formula to calculate this is:
Breakeven point = fixed costs ÷ contribution per unit

Contribution per unit is calculated as:
Selling price – variable cost per unit

Total contribution is calculated as:
Sales revenue – total variable costs

Total variable costs are calculated as:
Variable cost per unit x quantity

Question 2

Example

Answer 2

Mary makes birthday cakes in addition to the standard items she sells. She has fixed costs of £7,000. Her variable cost per cake is £12 and her selling price is £90.
Contribution per unit = selling price – variable cost
Contribution per unit = £90 – £12 = £78
Breakeven point = fixed costs ÷ contribution per unit
Breakeven point = 7,000 ÷ 78 = 90 cakes
Mary needs to sell 90 cakes to break even.
What will happen if she sells fewer cakes?
What will happen if she sells more cakes?