Break-even analysis Break-even is zero profit Revenues just cover variable and fixed costs Contribution margin equals fixed costs Example: Sales $1,200,000 Variable Costs 864,000 Contribution Margin 336,000 Fixed Costs 336,000 Profit(Loss) 0 ========= Contribution margin: Sales minus variable costs (ALL variable costs) equals contribution margin Contribution margin is the money left over after variable costs are covered; it is the money available to cover fixed costs and then profit. Example: I sell a product with a variable cost of $55.00 for $75.00 The contribution margin is $20.00 (sales price ? variable cost) After I pay for the merchandise, I have $20.00 per unit to cover the rent, and other fixed costs After I pay for all the fixed costs, the company earns profit at a rate of $20.00 per unit Formula for break-even: To determine the number of units that must be sold to break even the formula is: Fixed costs CM per unit Example: The Avenue B Company produces one product The following information is available for this product: Sale price $ 90.00 Materials $ 35.00 Labor $ 15.00 Variable overhead costs $ 5.00 Fixed costs $40,000 What is Avenue B?s break-even in units? How many units and dollar sales must the company achieve to obtain a profit of $10,000? Contribution Margin Per Unit Sales $90.00 Variable costs $55.00 Contribution margin $35.00 ===== Break even in units Fixed costs $40,000 = 1,143 units (rounded up) CM/unit $35
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