AS - Break even analysis Flashcards
What is break-even analysis ?
When total costs = total revenue
According to break even analysis, when is a business making a loss?
When costs are more than revenue i.e sales are below the break even output
According to break even analysis, when is a business making a profit ?
When revenue exceeds costs i.e sales above break even output
What is the formula for contribution per unit?
Selling price per unit - variable costs per unit
What are the two formulas for total contribution?
Total revenue - Total variable costs
Contribution per unit x no. of units
What is contribution ?
What a business needs to achieve from selling products in order to cover fixed costs then make a profit
How do you calculate break even output ?
Contribution pu
How do you calculate margin of safety ?
Actual output - break even output
What does a positive margin of safety represent ?
Profitability
What does a negative margin of safety mean?
The business is making a loss
What are the ways of improving margin of safety ?
Increasing contribution per unit:
- Raising sp. -reducing vc
Lower break-even output:
- Reduce FC. - Turn FC into VC
Increase output
What do break even charts show ?
Display costs + revenue plotted against output
How costs + rev vary with output
Where is output displayed on a break even chart ?
Horizontally
Where are costs + revenue displayed on a break even chart ?
Vertically
What do you plot on a break even chart ?
Total Revenue
Total Costs
Break even
Fixed Costs
