Fundamentals of Business

Suppose

Suppose. Overheads (fixed) costs per week are;
Rent = £50
Utilities = £25
Staff wages = £100
Total overheads per week = £175
Break even point occurs when fixed cost is equal to contribution [sales - direct (variable costs)], meaning there is neither loss nor profit.

How many items does Burger 'n' Bun need to sell just to break even per week?
Let
The number of any items be = n
Total overheads = average contribution x n
Therefore
n = 175/0.34 = 515 approx
Number of items to break even per week = 515
In worst case scenarios, whereby, only one kind of item is sold the whole week,
It will take
175/0.5 = 350 jacket potatoes to break even
Or
175/0.2 = 875 Heinz Beans to break even
Or
175/0.30 = 583 Tea to break even
Or
175/0.4 = 438 Bread 'n' Butter to break even
Or
175/0.3 = 583 Fried eggs to break even

Contribution (margin)
Before a business makes any profit it has to pay for its overheads (capacity costs) first, every single item sold contributes to the overheads first and then to trading profits.

Break even is a benchmark of performance, Burger 'n' Bun must ensure it sells no less than 515 items weekly on average or else it will struggle to meet the costs of its overheads. Note: contribution margin is contribution expressed as a percentage.

Limitations
. Break even analysis is only a supply side (i.e.: costs only) analysis, as it tells you nothing about what sales are actually likely to be for the product at these various prices.
. It assumes that fixed costs (FC) are constant
. It assumes average variable costs are constant per unit of output, at least in the range of likely quantities of sales.
. It assumes that the quantity of goods produced is equal to the quantity of goods sold (i.e., there is no change in the quantity of goods held in inventory at the beginning of the period and the quantity of goods held in inventory at the end of the period.
. In multi-product companies, it assumes that the relative proportions of each product sold and produced are constant (i.e., the sales mix is constant).

The most useful measure of profitability is Return on capital (ROC). The result is shown as a percentage, determined by dividing relevant income for the 12 months by capital employed; Return on equity (ROE) shows this result for the firm's shareholders. Firm value is enhanced when, and if, the return on capital, which results from working capital management, exceeds the cost of capital, which results from capital investment decisions as above. ROC measures are therefore useful as a management tool, in that they link short term policy with long-term decision making.
Mathematically
Profitability = profits/capital employed x 100%