Break-even analysis
| English | Chinese | Pinyin |
|---|---|---|
| break-even point | 盈亏平衡点 | yíng kuī píng héng diǎn |
| contribution | 贡献 | gòng xiàn |
| fixed costs | 固定成本 | gù dìng chéng běn |
| break-even output | 盈亏平衡产量 | yíng kuī píng héng chǎn liàng |
| total revenue | 总收入 | zǒng shōu rù |
| margin of safety | 安全边际 | ān quán biān jì |
The point where you stop losing money
- A new café pays rent and wages from day one, but takings build slowly. At some level of sales, it finally covers its costs.
- That magic level is the break-even point 盈亏平衡点.
Selling price is 15 and variable cost per unit is 9. What is the contribution per unit?
Contribution = 15 − 9 = 6.
Selling price minus variable cost per unit gives the ______ per unit.
Contribution covers fixed costs, then becomes profit.
Contribution 贡献
- Contribution per unit = selling price − variable cost per unit.
- Each unit sold "contributes" this much towards covering fixed costs 固定成本.
Break-even analysis
Break-even is where total revenue crosses total cost.
Fixed costs are 3,000 and contribution per unit is 6. What is the break-even output (units)?
Break-even = 3000 ÷ 6 = 500 units.
At the break-even point, the business makes:
Revenue exactly equals total cost — no profit, no loss.
The break-even point
- Break-even output 盈亏平衡产量 = fixed costs ÷ contribution per unit.
- At this output, total revenue 总收入 exactly equals total cost — no profit, no loss.
Below break-even the firm makes a loss; above it, a profit.
Break-even output is 400 and the firm sells 520. What is the margin of safety (units)?
Margin of safety = 520 − 400 = 120 units.
Margin of safety 安全边际
- Margin of safety = actual output − break-even output.
- It shows how far sales can fall before the firm makes a loss.
Worked example. Price 20, variable cost 12 → contribution = 8. Fixed costs 4,000 → break-even = 4000 ÷ 8 = 500 units. If the firm sells 650, the margin of safety is 650 − 500 = 150 units.
You've got it
- contribution per unit = price − variable cost per unit
- break-even output = fixed costs ÷ contribution per unit (revenue = total cost)
- margin of safety = actual − break-even output: how far sales can fall