2.2.3 - Breakeven Flashcards
Def breakeven
A level of output at which total sales revenue is equal to the total costs of production
Why is knowing breakeven important for a business
Useful for managers allowing them to have a minimum target of sales to aim for to ensure no loss is made
3 things business needs to know to work out break even
- selling price
- variable cost per unit
- fixed costs
Break even formula
Break even = fixed costs / (selling price - variable cost per unit)
Contribution per unit formula
Selling price - variable cost per unit
What is contribution used for
- to pay firms fixed costs
- remainder used generates profit
How can contribution per unit be increased (2)
- increase selling price
- reducing variable costs
Total contribution formula
Cost per unit x quantity sold
Where is the fixed costs line on a breakeven diagram
It’s flat, showing that fixed costs are the same at all levels of output
Where is the total costs line on a break even diagram
Total costs line shows affects of adding fixed costs and variable costs, therefore starts on left of fixed costs line and moves upwards in line with rate of increase variable costs
Total revenue line on break even chart
Starts at point 0,0 because no revenue is generate if nothing is sold
Where is breakeven output on a break even chart
Point at which total revenue and total costs cross
Formula breakeven point
Total fixed costs + total variable costs = total revenue
Def margin of safety
The difference between the breakeven output and the actual output achieved
What does margin of safety show
How far demand can fall before the firm slips into a loss-making position
