The break-even point
Contribution margin and its rate, break-even point in value and in quantity, the date it is reached in the year, margin of safety and reading the break-even on a chart.
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Contribution margin: what is it?
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Sales minus the costs that move with activity: what is left to cover fixed costs, then to make a profit.
Selling price €50, variable costs €30 per unit: each unit sold leaves €20 for fixed costs. Until they are covered, the company loses money.
A product sells for €50 a unit, with €30 of variable costs, and €40,000 of fixed costs. What is the break-even point in quantity?
- 2 000 unités
- 800 unités
- 1 333 unités
- 500 unités
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2 000 unités
The margin per unit is 50 − 30 = €20, so 40,000 / 20 = 2,000 units. 800 divides by the selling price (forgetting variable costs); 1,333 by the variable costs; 500 by 50 + 30.
Break-even in value = … divided by the ….
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Break-even in value = fixed costs divided by the contribution margin ratio.
Each euro of sales earns the margin ratio: so as many euros of sales are needed as it takes for that ratio to cover fixed costs. With €60,000 and 40%, you get €150,000.
Contribution margin ratio: what is it?
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The share of each euro of sales left after the costs that move with activity: that difference divided by sales.
A ratio of 40% means €1 of sales leaves €0.40 to cover fixed costs. It is used to find the break-even in value: fixed costs divided by this ratio.