break even Flashcards
what is the formula for contribution per unit?
selling price-variable cost
what are the 2 formulas for total contribution?
total revenue-total variable cost
unit contribution x number of units sold
define contribution
the amount of money left over after variable costs have been subtracted from the revenue
what is the break even point?
when total costs are the same as total revenue
what is break even output ?
the level of output a business needs to produce so that total costs are exactly the same as total revenue
how do you calculate break even point ?
total fixed costs + total variable costs = total revenue
how do you use contribution to calculate break even point?
fixed costs/contribution
what is the margin of safety?
the guide of how many sales can fall before a loss is made
how do you calculate margin of safety?
actual output - break even output
would business prefer to operate with a large or small margin of safety? why?
a large margin of safety because it would mean that if sales drop, they are still able to make profit
if the price went up, what would happen to break even point?
it would decrease
what are some limitations of break even?
- it assumes all output is sold
- does not adapt to external changes like pricing or wages or technology
- it assumes that the total revenue and total cost is completely straight, which is not the case, e.g offering discounts on large orders
what will happen to B.E point if sales were forecasted to rise?
decrease
