3c-cost and break even analysis Flashcards
Q: What are the different types of costs in a business?
Fixed Costs: Costs that do not change with output (e.g., rent, salaries, insurance).
Variable Costs: Costs that change depending on output (e.g., raw materials, wages per item).
Total Costs: The sum of fixed and variable costs.
Formula: Total Costs = Fixed Costs + Variable Costs
Q: Why is understanding costs important for businesses?
A:
Helps set appropriate prices for products.
Ensures businesses can control expenses and maximise profit.
Essential for break-even calculations.
Q: What is contribution per unit?
A:
The amount each unit sold contributes towards covering fixed costs.
Formula: Contribution per unit = Selling price - Variable cost per unit
Q: What is break-even analysis?
A: A financial calculation that determines how many units a business must sell to cover its total costs.
Q: What is the break-even point?
A:
The level of output at which total revenue equals total costs (no profit, no loss).
Formula: Break-Even Output = Fixed Costs ÷ Contribution per Unit
Q: What are the key components of a break-even chart?
5
Fixed Costs Line: A horizontal line showing constant fixed costs.
Total Costs Line: Starts from fixed costs and rises as output increases.
Revenue Line: Starts from zero and increases with sales.
Break-Even Point: The point where total costs and revenue lines intersect.
Margin of Safety: The number of units sold beyond the break-even point.
Formula: Margin of Safety = Actual Sales - Break-Even Sales
Q: What does margin of safety indicate?
A: The safety cushion a business has before making a loss.
Q: What are the advantages of break-even analysis?
A:
Quick and easy to calculate.
Helps businesses set realistic sales targets.
Assists in pricing strategies and cost control.
Useful for securing loans and investment.
Q: What are the disadvantages of break-even analysis?
A:
Assumes all products are sold (ignores unsold stock).
Assumes costs and revenues are constant, which may not be realistic.
Does not account for external factors like market demand.
