2.2.3 Break Even Flashcards

1
Q

Define break even

A

Is the point at which a business is not making a profit or a loss

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2
Q

After reaching break even each additional unit sold will contribute towards

A

Profit

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3
Q

How do you calculate break even

A

Fixed cost / contribution

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4
Q

How do you calculate

A

Selling price - variables

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5
Q

How do you calculate total contribution

A

Contribution x units

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6
Q

•Before reaching break-even a business is operating at a

A

Loss

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7
Q

What is contribution

A
  • In business each time a product is sold or service provided what does the money generated contribute towards?
  • it has to firstly pay for its own variable costs and then contribute towards the fixed costs
  • until there are enough contributions to cover all the fixed costs the business can not start to make a profit
  • Each time an item is sold the difference between the selling price and the variable cost is contributed towards the fixed cost
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8
Q

What is the Margin of safety

A

•Margin of safety is how much actual output is above the break-even level of output

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9
Q

How do you Calculate margin if safety

A

Actual output level -Break even level of output

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10
Q

Changing variables to keep in mind when handling break even

A
  • Businesses should treat break-even with a degree of caution
  • It is based on the assumption that costs and revenues will be static, in reality this is not true
  • Businesses are advised to consider the variables that might change and possibly look at a number of scenarios
  • Variables can change for the better or worse
  • What variables might change?
  • Fixed costs
  • Landlord puts rent up
  • Bank changes interest rates
  • Management want pay increase
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11
Q

Strengths of break even

A

•Allows businesses to calculate the minimum number of sales needed before starting to make a profit and therefore for see if a venture is viable

Can calculate the level of profit or loss at different levels

Can predict the outcome of changing variables

Provides a target

Aids decision making

An integral part of a business plan when seeking finance

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12
Q

Weaknesses of break even

A

Only indicates the number of sales needed does not ensure actual sales will materialise

Ignores changes in variable costs or selling price as items are bought or sold in larger quantities

•Even fixed costs can vary in reality, especially in the long run

Is an predicted costs and revenue

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