3.3 Break-even analysis Flashcards
Contribution per unit (formula)
price per unit - variable cost per unit
Total contribution (formula)
total revenue - total variable cost
contribution per unit x total number of units
Break-even chart
A diagram showing how total costs and revenue change with increasing production/sales.
Break-even quantity (BEQ)
The level of sales or output, where costs equal revenue and the firm is making neither a loss nor a profit.
Break-even revenue (BER)
The level of sales revenue earned by the firm at the break-even level of output (where sales revenue equals the costs of production).
Break-even point (BEP)
Where total costs and total revenue lines cross.
Margin of safety
The difference between planned or actual level of production/sales and the break-even quantity.
Break-even quality (BEQ) - formula
total fixed cost / contribution per price unit
Revenue - formual
quantity x selling price
Profit/ loss - formula
revenue - cost
Margin of safety - formula
actual sales−break-even point
Target profit output - formula
(fixed cost + target profit) / contribution per unit
Benefits of break-even analysis
- Relatively easy to draw, providing a visual way of analysing a firm’s revenues, costs, profit and loss at different levels of output.
- Indicates the lowest amount of output necessary to prevent losses.
- Useful for calculating resource requirements.
- Supports investment appraisal when choosing between competing products.
- Shows how changes in costs impact on profit levels and break-even quantity.
Limitations of break-even analysis
- Ignores the use of stocks.
- Assumes all products made are sold.
- Assumes all relationships are linear (straight lines).
- Assumes all variables can be changed independently.
- Is a static model, but the environment is dynamic.
- Ignores all factors other than costs and revenues
