Calculating a break-even point – using the contribution method
You can calculate the break-even point using the contribution method.
Contribution = selling price – variable costs
Rholiau Rhian’s variable costs
For a sandwich (bread, butter, ingredients, packaging) are
90p per sandwich.
The selling price
For each sandwich is £3.50
Contribution
£3.50 – £0.90 = £2.60
So, each sandwich makes a contribution of £2.60
The contribution is what is 'left over' after the variable costs of each unit have been paid. The contribution goes towards covering the fixed costs. Once all the fixed costs have been paid, the business will have recovered its costs.
Fixed costs
Rholiau Rhian’s fixed costs are £1,560 a month.
So, we can calculate how many sandwiches the business would need to sell to break even.
£1560 ÷ £2.60 = 600 unit
The business will have to sell 600 sandwiches a month before starting to make a profit.