break even Flashcards
(6 cards)
1
Q
what is break even analysis?
A
diagram that shows level of output where a business neither makes a profit nor loss
2
Q
how is break-even point calculated?
A
fixed costs / (selling price per unit - variable costs per unit)
3
Q
advantages of break even analysis
A
- quick and cheap
- aids in target setting
- identifies margin of safety, which helps with planning
4
Q
limitations of break even analysis
A
- too simplistic, with some unrealistic assumptions
- assumes all output it sold, which is often not true
- doesn’t account for sudden changes in wages, prices or tech
- fixed costs can be stepped
5
Q
what is the margin of safety?
A
shows how much a producer can reduce output before the business starts to make a loss.
6
Q
How is the margin of safety calculated?
A
Fixed costs ÷ Contribution.
