5.5 - Break Even Analysis Flashcards
What is the meaning of contribution
Contribution refers to the money remaining after all direct and variable costs are taken away from the sales revenue. More specifically , contribution is the amount available to ‘contribute’ towards paying fixed costs of production once the variable costs has been deduced.
What does contribution per unit refer to
Refers to the difference between the selling price per unit and the variable cost per uni (or average variable cost)
State the contribution per unit formula
Contribution per unit = P - AVC (LOOK AT SLIDE 5 FOR EXAMPLE)
What is the formula for average variable cost
AVC=UC/Q
What is the formula for variable cost
VC=AUCxQ
What is average variable cost the same as
Variable cost per unit
What are the 2 ways total contribution can be calculated by
Total contribution = TR-VC
Or
Total contribution = contribution per unit x number of units sold
Total contribution = Q x (P-AVC)
What’s the formula for average total cost
ATC = TC/Q
TC = ATC x Q
When can profit be calculated
After contribution has been established
What do we need to know to make the contribution and profit calculation
Total fixed costs
What is the formula for profit
Profit = total contribution - FC (alternative way to calculate profit)
What’s the difference between the contribution and profit formula
Contribution only removes the variable costs while profit also subtracts the fixed costs
What’s the step after calculating the fixed and variable costs
Calculate how many units of product or what level of output they need to produce to cover all their costs
When does the break even point occur
When the total costs equals the total revenue
What does the break even point say about a firms finances
They are not making a profit or a loss, just covering LL ITS COSTS
