2.2.3 Break even Flashcards
contribution
difference between variable cost and sppu
(Important to firms producing a variety of products)
- pay firms fixed costs
- FC paid additional contribution generates profit
Total contribution
Contribution per unit
TR - TVC or CPU x Quantity sold (output)
SPPU - VCPU
-CPU can be increased by either increasing selling price or reducing variable costs
2 uses of contribution
- decide which product to invest in
- find out if need to raise prices or reduce FC
break even
-output when total costs = total revenue
No loss = no profit
break even output
formulae
Fixed costs divided by contribution per unit
Break even point is point on the graph of a simple break even analysis
margin of safety
difference between actual and break even output
Output at which a business is earning profit
Current output - break even output
impact on break even with
Increase in:
FC
VCPU
SPPU
FC = B Even point becomes higher
VCPU = B even point higher , gradient of TC line steepens
SPPU = B even point become lower
Decrease in SPPU = TR line gradient flatter, B even output = higher
Analysis of break even
6 Positives
1-entrepreneur understand risk
2-quick/easy
3- impact of changing variables on BE and profit
4-start up FC minimum
5-understand validity of business (and lenders/investors)
6-how long before start up = profitable
Analysis of break even
6 Negatives
1-Sales unlikely same output (wasted output)
2-BE analysis planning aid not decision making tool
3-unrealistic assumption (products not same price/output) (FC vary when output changes)
4-VC change e.g output increase benefit buy inputs at lower price = lower VCPU
5-MoS calculation shows how much a sales forecast can prove over optimistic before losses are incurred
6-sell more 1 product, BE analysis =harder to calculate
overhead costs
costs which do not change with output such as rent
