Break-Even & Profitability Analysis
Business: AQA A Level (2023 Specification), topic 5.2.1
Break-Even Analysis
Businesses can use breakeven analysis to predict the level of output at which total costs and total revenues will be the same.
Contribution per unit
- Contribution per unit is the amount of revenue which contributes to covering a business' fixed costs after the variable cost per unit has been taken away from revenue per unit.
Calculating contribution per unit
- Contribution per unit is calculated as the selling price per unit – variable costs per unit.
Total contribution
- Total contribution is the amount of revenue from the sale of all products which contributes to fixed costs once total variable costs have been taken away.
Calculating total contribution
- Total contribution is calculated as total revenue – total variable costs.
Profitability Analysis
Businesses can analyse their profitability using gross profit, operating profit, and profit for the year objectives.
Gross profit
- Gross profit targets involve the amount of profit remaining once direct costs (cost of sales) have been paid by the business.
- Gross profit margin = (gross profit ÷ sales revenue) × 100
- For example, a supermarket may use gross profit margin targets to compare performance across years. A decrease in gross profit margins may lead the supermarket to focus on reducing the supermarket's cost of sales.
Operating profit
- Operating profit targets involve the amount of profit remaining once direct costs (cost of sales) and indirect costs (expenses) have been paid by the business.
- Operating profit margin = (operating profit ÷ sales revenue) × 100
Profit for the year
- A profit for the year target involves the amount of profit remaining once all costs and financing fees have been considered.
- Profit for the year margin = (profit for the year ÷ sales revenue) × 100
Test yourself on Break-Even & Profitability Analysis
A business sells pens for £0.8 per unit. The variable cost per unit is £0.4. What is the contribution per unit?
A clothing retailer has annual sales revenue of £1,000,000. The cost of sales, which includes materials and production costs, amounts to £600,000. Calculate the gross profit margin for the retailer.
A technology company reports sales revenue of £2,500,000 and has direct costs (cost of sales) of £1,200,000. The company also incurs indirect costs (expenses) totaling £700,000. Calculate the operating profit margin for the company.
A restaurant generates a sales revenue of £800,000. After deducting all costs, including the cost of sales, expenses, and financing fees, the restaurant's profit for the year is £120,000. Calculate the profit for the year margin.