3.3 break even analysis Flashcards
Break even analysis
Break-evenanalysis isa management tool used to calculate the levelof salesneeded to cover all costs of production. Thereafter, further salesgenerate a positive safetymargin, and hence profit for the business.
Break-eve n chart
Break-even chart is the name given to the graph that shows a firm’s costs, revenues and profits (or loss) at various levels of output.
Break-even point
Break-even point refers to the position on a break-even chart where the total cost line intersects the total revenue line, i.e. where TC = TR.
Break-even quantity
Break-even quantity refers to the level of output that generates neither profit nor loss. It is shown on the x-axis on a break-even chart.
Gross profit - TFC = 0
((P - AVC) x Q) = TFC
Q= TFC/(P - AVC)
Contribution per unit
Contribution per unit (or unit contribution) is the difference between the selling price of a product and its variable costs of production, i.e. P - AVC. The surplus goestowards paying fixed costs.
margin of safety
The margin ofsafety (MOS) is the difference between a firm’s level of demand and its break-even quantity. A positive MOS means the firm can decrease output (sales volume) by that amountwithoutmaking aloss. Anegative MOS meansthefirm is making a loss
MOS = Level of demand - BEQ
Profit
Profit is the positive difference between a firm’s revenue and its costs. On a break-even chart, profit is shown at all levels of output beyond the break-even quantity.
special order decision
a special order decision occurs when a customer places an order at a price that differs from the normal price charged by the business
Total contribution (TC)
Total contribution is the unit contribution (P - AVC) multiplied by the quantity of sales (Q), i.e. total contribution = (P - AVC) x Q. It is, essentially, a firm’s gross profit.
