Intermediate level · Module 2: Cost Behaviour and Break-Even Decisions · Lesson 1 of 3
Contribution and Break-Even
Find how many units must be sold to cover all costs.
In this lesson you will
- Calculate contribution per unit
- Calculate break-even volume
Key concepts
selling pricevariable cost per unitcontributionbreak-even volume
The lesson
Contribution per unit = selling price − variable cost per unit. It is what each sale contributes towards fixed costs and profit.
Break-even volume = fixed costs ÷ contribution per unit. Below it the business makes a loss; above it, each unit adds its contribution to profit.
Target-profit volume = (fixed costs + target profit) ÷ contribution per unit.
Step by step
- Calculate variable cost per uniform.
- Calculate contribution.
- Calculate break-even volume.
- Calculate volume for a target profit.
Break-even for a tailoring workshop
How many school uniforms a workshop must sell each month to cover its costs and reach a profit target.
| Item | Working | Amount |
|---|---|---|
| Selling price per uniform | agreed price | 15,000 |
| Variable cost per uniform | fabric, thread, buttons, piece-rate pay | 9,000 |
| Contribution per uniform | 15,000 − 9,000 | 6,000 |
| Fixed costs per month | rent, salaried staff, machine upkeep | 540,000 |
| Break-even volume | 540,000 ÷ 6,000 | 90 uniforms |
| Volume for 120,000 profit | (540,000 + 120,000) ÷ 6,000 | 110 uniforms |
| Margin of safety at 120 uniforms | (120 − 90) ÷ 120 | 25% |
Explanation
Each uniform contributes 6,000 SSP towards fixed costs; after the 90th uniform, each one adds 6,000 SSP of profit.
With expected sales of 120 uniforms, sales could fall by a quarter before the workshop makes a loss.
Check your understanding
90 × 6,000 = 540,000, and 120 uniforms give (120 − 90) × 6,000 = 180,000 SSP profit.
Practice activity
Complete the break-even analysis for the workshop.
Expected result: Correct break-even and target-profit volumes.
Check your understanding
-
How is contribution per unit calculated?
Show answer
Selling price − variable cost per unit.
-
How is break-even volume calculated?
Show answer
Fixed costs ÷ contribution per unit.
Taught live by an instructor — online or in person. Free course lessons are for self-study and do not lead to a certificate — see registration options.