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ANALYSIS
INTRODUCTION
Every
business
manager
should
want
to
know
how
many
products
need
to
be
sold
or
services
provided
to
cover
the
total
costs
of
the
business.
That
is
they
need
to
know
what
it
takes
to
break
even.
If
a
business
cannot
break-even
then
decisions
need
to
be
made
to
correct
the
situation.
Because
break-even
is
the
point
where
total
costs
equal
total
revenue,
anything
sold
above
the
break-even
point
results
in
a
profit
being
made;
while
anything
sold
below
break-even
point
results
in
a
loss
for
the
business.
TOTAL
COSTS
Total
costs
are
made
up
of
two
main
types
of
costs.
These
are:
- Fixed
costs
- Variable
costs
Fixed
Costs
Fixed
costs
are
so
called
because
they
do
not
vary
with
the
level
of
activity
or
output
within
a
given
range
e.g.
For
rent
or
land
rates,
it
does
not
matter
if
you
sell
or
produce
no
products
or
whether
you
sell
or
produce
a
number
of
products,
you
still
pay
the
same
amount.
Variable
Costs
Variable
costs
are
so
called
because
they
vary
in
proportion
to
the
level
of
activity
or
output.
If
output
doubles,
so
does
the
variable
cost
i.e.
direct
labour
and
direct
materials
BREAK-EVEN
POINT
To
calculate
the
break-even
in
units
arithmetically,
we
use
the
formula:
Break-even
(units)
=
Fixed
Costs
Contribution
Margin/unit
Where:
Contribution
Margin/unit
=
Selling
price
(per
unit)
-
Cost
Price
(per
unit)
To
calculate
the
break-even
in
dollars
we
multiply
the
break-even
units
by
the
unit
selling
price.
CHANGES
IN
FIXED
COSTS
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Any
changes
in
fixed
costs
would
cause
the
break-even
point
to
change.
If
fixed
costs
decreased
the
break-even
point
would
drop.
If
fixed
costs
increased
then
the
break-even
point
would
rise
PROFIT
AND
LOSS
CALCULATION
As
noted
earlier,
because
break-even
is
the
point
where
total
costs
equal
total
revenue,
anything
sold
above
the
break-even
point
results
in
a
profit
being
made;
and
anything
sold
below
break-even
point
results
in
a
loss.
To
calculate
whether
a
profit
or
loss
is
made
we
can
use
the
following
formula:
(Sale
units
-
break-even
units)
contribution
margin
per
unit
Note:
If
we
have
a
negative
result
we
have
made
a
loss.
If
we
have
a
positive
result
we
have
made
a
profit
Thus,
anything
above
break-even
the
margin
contributes
to
the
profit
of
the
business
by
the
amount
of
the
contribution
margin
per
unit;
and
anything
below
break-even
contributes
to
a
loss
by
the
contribution
margin
per
unit.
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