2.2.3 Break Even Flashcards
Define break even
This is the point when a businesses revenue is generated through the sales of its products will cover total costs
What is the purpose of break even analysis
It is fine to help a business make important decisions about costs and prices
What are the uses of break even analysis
- decide wether a business idea is profitable and viable
- identify the level of output and sales to generate profit
- asses changes in the level of production
- assess the effects of costing and pricing
What is contribution and how can it be calculated
Contribution is the difference between the variable costs of one unit and it’s selling price
Contribution = selling price - VC per item
How do you calculate break even
Fixed costs
——————
Contribution per unit
What are the three lines plotted on a break even graph
Fixed costs, total revenue and total costs
Where is the break even point on a graph
This is where the total revenue and total costs point meet
What happens when variable are changed
This will impact the trajectory of the lines and either raise some or decrease
E.G raises in price can lead to increased revenue
What is the margin of safety on a break even graph
This is the difference between the break even point and the current level of output
- the size of a margin will determine risk of the business
How do you calculate margin of safety
Current level of output- break even point
What are some benefits of break even analysis
Can be used to analyse the impact of varying customers, prices and costs on a business profits
- simple and easy to use
- the break even point is useful guideline to help business make decisions
What are some limitations of break even
Break even analysis simplified what can be a very complex process
- costs are rarely consistent
- break even focuses on output
