Break Even Flashcards
What is break even
the point where the business makes neither profit nor loss, money received and money spent is equal
How is break even calculated?
fixed costs / contribution per unit
How is contribution per unit calculated?
selling price - variable costs per unit
How is total consumption calculated
sales revenue - total variable costs
How is total variable costs calculated?
variable costs per unit X quantity
What is margin of safety?
The actual number of units sold over and above the break even point
How is margin of safety calculated?
actual sales in units - break even level of output
On a chart, what does the fixed cost line look like?
A horizontal straight line at the fixed cost on the y axis
On a chart, what does the variable cost line look like?
Always starts at 0, as output increases the variable costs will increase, slopes upwards from 0
On a chart, what does the total costs line look like?
Starts at the fixed cost point, slopes upward, should be parallel to the variable cost line
On a chart, what does the total revenue line look like?
Starts at 0, slopes upwards as sales increase
How do you identify the break even point on a chart?
The crossover of the total revenue line and the total cost line
What is contribution per unit
the amount of profit the business generates per unit of product it sells
What are the benefits of contribution per unit
Straightforward to calculate, can be used to inform decisions, can be used to carry out what-if analysis
What are the limitations of contribution per unit
Does not take fixed costs into account, Assumes all prices stay constant
How can break even be used for planning
sets budgets for the sales necessary and for costs, forms a plan to start profit-making, and informs pricing decisions
How can break even be used for monitoring?
Monitor progress towards achieving break even point, identify changes to selling price of goods, take corrective action if targets look unlikely to be met
How can break even be used for control?
keeps costs within budget, motivate employees, and manage sake accounts
How can break even be used for target setting?
sets sale targets for individual employees, sets expenditure budgets, set profit budgets
What are the benefits of break even
Business knows how many items it must sell to reach break even, sets targets which motivates employees, identifies fixed and variable costs
What are the limitations of break even
Does not take into account variations in costs or selling prices, forecasts may not be achieved, and targets may be set to high (creates stress)
