For this chapter, you should be able to...
1. distinguish between CONTRIBUTION PER UNIT and TOTAL CONTRIBUTION
2. draw a BREAKEVEN CHART and calculate the BREAKEVEN QUANTITY, PROFIT and MARGIN OF SAFETY
3. calculate TARGET PROFIT OUTPUT, TARGET PROFIT and TARGET PRICE
4. examine the BENEFITS AND LIMITATIONS OF BREAKEEVEN ANALYSIS
1. distinguish between CONTRIBUTION PER UNIT and TOTAL CONTRIBUTION
2. draw a BREAKEVEN CHART and calculate the BREAKEVEN QUANTITY, PROFIT and MARGIN OF SAFETY
3. calculate TARGET PROFIT OUTPUT, TARGET PROFIT and TARGET PRICE
4. examine the BENEFITS AND LIMITATIONS OF BREAKEEVEN ANALYSIS
1. CONTRIBUTION
Contribution is used in calculating how many products need to be sold in order to cover a firm's costs
= it determines how much a product contributes to its fixed costs and profit after deducting the variable costs.
Formula:
Contribution per unit = Price per unit  Variable cost per unit
Total contribution can be calculated in two ways:
1. Total contribution = Total revenue  Total variable cost
2. Total contribution = Contribution per unit x number of units sold
Profit can be calculated after contribution is calculated
Formula:
Profit = total contribution  total fixed costs
= it determines how much a product contributes to its fixed costs and profit after deducting the variable costs.
Formula:
Contribution per unit = Price per unit  Variable cost per unit
Total contribution can be calculated in two ways:
1. Total contribution = Total revenue  Total variable cost
2. Total contribution = Contribution per unit x number of units sold
Profit can be calculated after contribution is calculated
Formula:
Profit = total contribution  total fixed costs
2. Breakingeven
Breakeven is to calculate how many units or what level of output a firm needs to sell to cover all its costs
= The level of output where the total costs equal the total revenue
= At this point the firm will neither make a profit nor a loss
Breakeven chart:
= The level of output where the total costs equal the total revenue
= At this point the firm will neither make a profit nor a loss
Breakeven chart:
3. calculating breakeven quantity
4. profit or loss
The breakeven chart showed that that any sales that exceed the breakeven quantity generate profit for a business while sales that are less than the breakeven quantity lead to losses.
Profit = total revenue (TR)  total costs (TC)
Profit = total revenue (TR)  total costs (TC)
5. target profit
The breakeven chart can be used to determine the level of output that is needed to earn a given level of profit. The right side of graph shows profit.
An alternative method of getting target profit output is by using the following formula:
An alternative method of getting target profit output is by using the following formula:
6. breakeven revenue
Breakeven revenue is the revenue required to cover both the fixed and variable costs in order for a firm to break even.
It can be calculated by following formula:
It can be calculated by following formula:
7. benefits and limitations of breakeven analysis
Benefits

Limitations
