Aka. breakeven analysis. The study of the interrelationships between costs, volume, and profit at various levels of activity.
Contribution per Unit
Difference between selling price per unit and variable cost per unit.
Contribution to Sales Ratio
Aka. the profit/volume ratio. Measures how much contribution is earned from each unit of sales.
Breakeven Point
The level of activity at which there is neither profit nor loss. Total revenue equals total cost.
Margin of Safety
The extent by which actual or projected sales exceed breakeven sales.
Breakeven Chart
A graph plotting total cost and total revenue against volume of activity.
The fixed cost line runs horizontal. Total cost line starts at fixed cost and rises with variable cost per unit. Sales revenue line starts at the origin and rises with selling price per unit. The breakeven point is the intersection point of total cost and sales revenue lines. Margin of safety is the horizontal distance between that point and actual or budgeted sales.
May be time consuming to prepare.
Limitations
- Applies only to a single product or a single mix of a group of products.
- Assumes fixed costs, variable costs, sales prices are constant at all levels of output.
- Assumes production and sales are equal, ignoring inventory levels.
- Ignores the uncertainty in the estimates of fixed costs and variable cost per unit.
