Break Even Flashcards
Where is the loss area on a break even graph?
It’s the space between costs and revenue below the break-even point.
What is margin of safety?
This is the amount by which sales would have to fall before the break-even point is reached.
How is fixed costs marked on the graph?
It’s a horizontal line
Where is the break-even point on a graph?
It’s where the total costs and total revenue lines cross.
Define the term ‘break-even’ point
When a business has made enough money through product sales to cover the cost of making the product.
Name TWO items of information that you would need to know before you can create your break-even chart.
Fixed and variable costs as well as revenue
How do you label the vertical axis on the break-even chart?
Costs and revenue
How do you label the horizontal axis on the break-even chart?
Units
What is the break-even formula?
Fixed costs/Contribution (selling price per unit - variable cost per unit)
If you INCREASE your selling price what will happen to your break-even point?
It will decrease
If you DECREASE your selling price what will happen to your break-even point?
It will increase
What can breakeven analysis be used for?
When a new business is being set up, when a new product is being launched, to set realistic production targets, to set realistic sales targets, to review and analyse past performance
What are the benefits of breakeven analysis?
The business knows the fixed and variable costs linked to a product.
The business can analyse costs to see if any are too high and they can be reduced.
The business can set the BEST PRICE for the product
It allows the business to set a MARGIN OF SAFETY
It allows the business to stock or make the most PROFITABLE products.
What are the risks of ignoring breakeven analysis?
The business does NOT know the costs of production and running costs.
The cost of stock or raw materials might be TOO HIGH
The selling price might be too high to attract customers or too low to cover costs.
The business might make a loss without realising why.
If you are asked to DISCUSS the use of breakeven analysis what does this mean?
It means explain what breakeven is and what actions the business should take, what information she should obtain and how this information could affect her business decision.
