Question

Read the following information carefully and answer the questions that follow.

Jess runs a business which makes and distributes frozen chips to restaurants and hotels
in her local area. She buys potatoes from Johnson's, a local farm. The business spends
£50 000 each year on fixed costs. In 2018, the total variable costs came to £0.85 per kg
of chips and each packet of chips was sold for £1.80 per kg. Using these figures and her
actual sales in 2018 Jess worked out her break-even level of output and her margin of safety.
a) Calculate Jess's break-even level of output for 2018.
Give your answer to 3 significant figures.
Show your working.

Answer 1

Let's use the same information as above to show how a formula can be used to quickly calculate the break-even output.

Remember contribution per unit? Here is a reminder of this crucial and really useful formula:

Contribution per unit = selling price per unit less variable cost per unit

In our example, contribution per unit = £10 less £4 = £6 per unit

Now apply the classic formula for calculating breakeven output:

Break-even output (units) = Fixed costs (£) / Contribution per unit (£)

So, break-even output = £40,000 divided by £6 = 6,666 units

Note: break-even output is always expressed in terms of units

So break-even output = 6,666 units

If the information is available, it is always quicker and easier to use this formula rather than use a table or draw a chart.