3.3 Break even Flashcards

1
Q

Break even?

A

The level of output at which total costs equal total revenue

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2
Q

The formula for Break-Even?

A

Fixed cots/contribution per unit (price -VC)

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3
Q

What is the equation for total contribution?

A

Total revenue – Total variable cost

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4
Q

What is the equation for contribution per unit?

A

Price per unit – Variable cost per unit

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5
Q

Where is the break-even point on a break-even chart?

A

The intersection of Total Cost and Total Revenue
by calculation: BE quantity (units) * price

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6
Q

How do we get the Total revenue?

A

Price x output

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7
Q

What does the margin of safety show?

A

Shows how much demand exceeds or fails to exceed BEQ

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8
Q

What is the equation for margin of safety?

A

Sales volume (Current or Projected Demand/sales/output) – BEQ

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9
Q

Title of break even chart

A

Break Even Analysis for Company XYZ

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10
Q

Label axes

A

X-axis is output
Y-axis is Revenue/Cost (label currency as well)

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11
Q

Draw Total Revenue line

A

Starts at (0,0), intersects BEP

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12
Q

Draw Total Cost line

A

Starts at Fixed Costs and takes the slope of VCs, intersects the BEP

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13
Q

How do we calculate the BR revenue?

A

BEQ * price

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14
Q

Limitations of BE

A

Makes several assumptions:

Fixed costs must be paid regardless of the output

Variable cost increases linearly

Ignores economies of scale

Sales revenue increases linearly

Ignores discounts for large orders and price discrimination

Assumes only one product is sold

Every unit of output is sold

The selling price is constant regardless of units sold

Provides a static model (e.g. in real life production costs can change)

Depends on reliability of data

Other factors can have an effect (e.g. competitors, staff motivation)

Less suitable for multi-product lines

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15
Q

What does the break even help to find?

A

Helps to tell whether a good can be financially worthwhile and the level of profit a business is likely to earn

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16
Q

What does the BE ignore when calculating level of sales needed to attain a certain profit?

A

Ignores other factors that affect profit:

Different pricing throughout time
Level of demand is subject to change
Profit depends on risk
Innovation and luck – prediction aren’t always followed

17
Q

What does the BE have to consider when calculating level of sales needed to attain a certain profit?

A

Pricing strategies (penetration pricing, market skimming, etc.)

Price elasticity

18
Q

What is the formula to calculate the (target) output with given price and profit?

A

output= (Fixed costs+profit)/contribution per unit

19
Q

What is the formula to calculate (target) profit with given (target) output and contribution per unit?

A

output= (Fixed costs+profit)/contribution per unit

Farther:
FC+profit=CPUoutput
Profit=CPU
output-FC

20
Q

What is the formula to calculate the (target) price with given output and profit?

A

(Fixed costs+profit)/Price - VC=output

or
Farther:

price=(FC+profit+output*VC)/output

21
Q

Can a company have a negative margin of safety?

A

yes, if the current output is below the BEQ

22
Q

Can we express the margin of safety by %?

A

Yes, the difference between the current and BEQ/sales

23
Q

What do we have to necessarily indicate on the chart?

A
  1. The lines of TC, TR,
  2. the BE point itself! point by the arrow!
  3. the numbers on both axes must be sufficient to be scalable (take the BEQ and BER first on both axis, take more or less in the center; measure logically where would be the FC line or any other given data and write some additional numbers based on logic, like 30, 40, 50 on the x axis)
24
Q

How will the change in price affect BEQ?

A

With higher price:
less quantity is needed to break even.
TR line becomes steeper
Margin of safety increases
With lower price - the reverse happens

25
Q

How will the change in costs affect BEQ?

A

In the case of changes in FCs:
the starting point of TC shifts up (the slope remains the same)
and BEP shifts up and right, increasing the need of more output and revenue to brek-even

In the case of VC:
the starting point of the TC remains the same but
The slope becomes steeper and touches the TR in the upper and more right area, increasing the BEQ and BER

In both cases more output is needed to break even and in both cases the margin of safety is reduced