3.3 Break even Flashcards
Break even?
The level of output at which total costs equal total revenue
The formula for Break-Even?
Fixed cots/contribution per unit (price -VC)
What is the equation for total contribution?
Total revenue – Total variable cost
What is the equation for contribution per unit?
Price per unit – Variable cost per unit
Where is the break-even point on a break-even chart?
The intersection of Total Cost and Total Revenue
by calculation: BE quantity (units) * price
How do we get the Total revenue?
Price x output
What does the margin of safety show?
Shows how much demand exceeds or fails to exceed BEQ
What is the equation for margin of safety?
Sales volume (Current or Projected Demand/sales/output) – BEQ
Title of break even chart
Break Even Analysis for Company XYZ
Label axes
X-axis is output
Y-axis is Revenue/Cost (label currency as well)
Draw Total Revenue line
Starts at (0,0), intersects BEP
Draw Total Cost line
Starts at Fixed Costs and takes the slope of VCs, intersects the BEP
How do we calculate the BR revenue?
BEQ * price
Limitations of BE
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
What does the break even help to find?
Helps to tell whether a good can be financially worthwhile and the level of profit a business is likely to earn