Break even and contribution

1
Break even and contribution

• Unit 4 revision quiz

2
Define key terms

• FC
• VC
• TC
• TR
• Contribution (importance of) P-VC or SR
  TVC
• Profit contribution - FC
• B/E FC/contribution

3
Make a decision

• A single product manufacturer has this cost
  structure
• Materials 28, direct labour 12 and VC 12 per
  unit, fixed overheads of 420,000.
• Its product price is 120, annual output (80
  capacity) being 20,000
• A DIY store has enquired whether it can buy an
  extra 4000 units p.a. to sell as its own label
  item. It will pay 85 for each unit. The
  manufacturer will incur 10,000 set-up costs.

4
Some quick Qs

• What is the present Contribution?
• What is the present Break-even point?
• What is the present margin of safety?
• What is the current forecast profit?
• What would be the NEW ORDER contribution be per
  unit?
• What would be the NEW ORDER total contribution
  be?
• What would be the NEW ORDER new profit be?

5
And the answers

• What is the present Contribution?
• 55 price 120 - 65 VC (25 28 12)
• What is the present Break-even point?
• 7636 sales 4200/55
• 3. What is the present margin of safety?
• 12364 (20,000 7636)
• 4. What is the current forecast profit?
• 680,000 (12364 x 55)
• 5. What would be the NEW ORDER contribution be
  per unit?
• 20 (85-65)
• 6. What would be the NEW ORDER total contribution
  be?
• 80,000 4000x 20
• 7. What would be the NEW ORDER new profit be?

6
How can you improve a break even point?

• Reduce costs - but consider the implications
• Increase prices but what about elasticity?
• What about competitors
• Advertising but implications?