3.5.2.3 Analysing Financial Performance: How to Construct and Interpret Break Even Charts. Flashcards
What is contribution?
Whether an individual product or activity is helping to make product.
What does contribution do?
Ignores the fixed costs needed to be paid before a profit can be made. Only looks at the variable costs.
How does contribution link to sales revenue?
If the sales revenue from making the product is greater than the variable costs, the product is contributing towards either paying the fixed costs or making a profit (if already covered).
Contribution example.
If the variable costs of making a pen is 7 pence and the pen sells for 18 pence, then the contribution per unit is 11 pence (18-7).
What is the formula for contribution per unit.
Selling price per unit - variable costs per unit.
What is total contribution?
The difference between total revenue and total variable costs.
What is the formula for total contribution?
Contribution per unit x units of output.
or sales revenue - total variable costs.
Define break even output.
The level of output at which total sales revenue is equal to total costs of production.
What can a business use break even analysis for?
Calculate the break even output and the impact of changes in output on its profit.
What assumptions are made about break even analysis?
The selling price remains the same, regardless of units sold.
Fixed costs remain the same, regardless of number of units of output.
Variable costs vary in direct proportion to output.
Every unit of output that is produced is sold.
What is the formula for break even output?
Fixed costs/contribution per unit.
