Break-even = Fixed Costs/Contribution per unit
Contribution per unit = Selling Price-Cost Price
e.g. FC=$9000 & VC per unit = $25 & Selling price = $35.
How many units need to be sold?
9000/CPU(SP35-VC25)
BE = 9000/10
BE = 900 Units
Margin of safety = The difference between predicted total revenue and the break even point. In other words the level of profit a business expects to make against the level at which it will cover its costs.
Larger MOS = Stronger chance of making a profit and less susceptible to changes in market conditions. Also can be used to help with securing finance etc.
MOS = Predicted Sales-BEP
E.G. Predicted units sold from example above is 1000 therefore MOS = 1000-900 = 100 Units. This is about 10% so you could argue that this is a small margin if the product was quite low value and it was a new business unsure of its actual sales and predicting BEP for the first time. Therefore they need to lower prices or increase advertising to ensure they sell more units.
Contribution per unit = Selling Price-Cost Price
e.g. FC=$9000 & VC per unit = $25 & Selling price = $35.
How many units need to be sold?
9000/CPU(SP35-VC25)
BE = 9000/10
BE = 900 Units
Margin of safety = The difference between predicted total revenue and the break even point. In other words the level of profit a business expects to make against the level at which it will cover its costs.
Larger MOS = Stronger chance of making a profit and less susceptible to changes in market conditions. Also can be used to help with securing finance etc.
MOS = Predicted Sales-BEP
E.G. Predicted units sold from example above is 1000 therefore MOS = 1000-900 = 100 Units. This is about 10% so you could argue that this is a small margin if the product was quite low value and it was a new business unsure of its actual sales and predicting BEP for the first time. Therefore they need to lower prices or increase advertising to ensure they sell more units.
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