GRADE 11
LESSON
WEEK 23 - Lesson 4 of 16
76
MANUFACTURING
WORKSHEET 5
CONTRIBUTION PER UNIT
&
BREAK-EVEN POINT
CONTRIBUTION / MARGINAL INCOME
Contribution (or also called the marginal income) is the amount that the goods produced in
the factory contribute towards paying the fixed and other costs of the business
It is the difference between the selling price per unit and the variable cost per unit.
(SP/unit – VC/unit)
It is used to calculate the break-even point
EXAMPLE 1
Mr Baloyi produces 1 800 cakes and sells them for R20 each.
Variable cost = R17 000
Fixed cost = R10 000
Total cost of production = R17 000 + R11 000 = R28 000
Selling price = 1 800 x R20 = R36 000
You can calculate the contribution per unit (the contribution of one cake) as follows:
Contribution per unit = Sales – Variable cost
Units produced
= 36 000 – 17 000
1 800
= 19 000
1 800
= R10,56
76 Accounting Grade 11 - CAPS
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OR
Contribution per unit = selling price for one unit – Variable cost for one unit
= R20 – 17 000
1 800
= R20 – R9,44
= R10,56
BREAK-EVEN POINT
It is important that a businessman must consider how many products they need to sell before
they start making a profit.
The break-even point is the number of units that needs to be sold to cover all costs, but no
profit is made.
It is where the total receipts are equal to the total costs.
It is the point where there is no profit and no loss.
It means the business breaks even, it earns just enough from sales to pay for its costs.
EXAMPLE 2
Sun Manufacturers manufacture and sell T- shirts and the information that we have is the
following:

Selling price
R50 each for a T-shirt

Fixed cost
R120

Variable cost
R 20 per T-shirt

Total production cost is R120 + R20 = R140
The cost of R140 is more than the selling price of one T –shirt (R50). It is therefore important
to establish how many T-shirts you have to sell before a profit can be made
76 Accounting Grade 11 - CAPS
2
How many T-shirts do you have to sell before a profit can be made?
Total Fixed cost +
Total Variable cost =
Total production cost
Selling price
(total production cost)
= profit
If only one is sold
then you are still
making a loss
SP – CP = profit
50 -140 = - 90 (loss)
Production Costs
Total
Production
cost
Selling
price of the
units sold
Profit
+ R20
= R140
R50
(R90)
+ R40
= R160
R100
(R60)
R120
+ R60
= R180
R150
(R30)
4
R120
+ R80
= R200
R200
0
5
R120
+ R100
= R220
R250
R30
6
R120
+ R120
= R240
R300
R60
7
R120
+ R140
= R260
R350
R90
Units
sold
Fixed
Cost
Variable cost
1
2
R120
R120
3
When four are sold,
the cost is equal to
the selling price
[200 – 200] and
therefore zero profit
(being the breakeven point.)
When five are sold
the business
starts to make a
profit
of R30.
The break-even point is arrived at when we have made and sold 4 T-shirts. After selling
four t-shirts will we be able to start making a profit.
The break –even point can be calculated by using a formula.
The break-even point can be calculated in units as well as rand value
Break-even sales in units
Total fixed costs .
Contribution per unit
=
Total fixed cost
.
Selling price per unit – Variable cost per unit
= x units
Break-even sales in value
Break-even point in units x selling price per unit
= Rx
76 Accounting Grade 11 - CAPS
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EXAMPLE 3
INFORMATION
Sun Manufacturers manufactures hand cream and provides the following information:
Total fixed cost
Total variable costs
Fixed costs per unit
Variable cost per unit
Total costs
Total cost per unit
Number of units produced
Selling price per unit
R14 400
R10 800
R24
R18
R25 200
R42
600
R50
REQUIRED
Calculate the break-even point in units
Calculate the break-even point in
sales value
Break-even point in units x selling
price per unit
Total fixed costs .
Contribution per unit
=
Total fixed cost
.
Selling price per unit – Variable cost per unit
= 450 units x R50
= R22 500
= 14 400
50 – 18
= 14 400
32
= 450 units
Total
sales
Total costs
profit
area
22 500
Variable
Cost (R)
14 400
loss
area
Fixed
0
450
units
Do activities from the text book on Break-even point
76 Accounting Grade 11 - CAPS
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