Break-Even Flashcards
What is break even ?
How is it calculated?
It is when total costs = total revenue
Break-Even = Fixed costs/CPU
What is CPU?
How do you work it out?
Contribution per unit
CPU = S.P.P.U - V.C.P.U
What is S.P.P.U ?
What is VCPU?
Selling price per unit
Variable costs per unit
What is a break even chart?
A graph showing the revenue and costs for a business at all possible levels of demand or output.
What is the margin of safety?
How do you calculate it?
The amount by which demand can fall before the company starts making a loss.
Margin of safety = actual sales - breakeven point
What is total contribution?
How do you calculate it?
Difference between the selling actual price of a unit minus the variable costs of the unit.
Total contribution = contribution per unit x quantity sold
What should be considered when a business decides on considering a price change?
- potential impact on revenue, profits and break-even of price change
- potential impact on revenue, profits of change in demand and trends
- the effect of a rise or fall in variable costs (eg raw materials)
- the effect of a rise or fall in fixed costs (eg relocating)
What happens in an organisation if a price rises?
- how does it effect the break even placement?
A company increases in price can cause a revenue line to rise more steeply. Start at same point but it will go higher higher at max output.
This will therefore, lower the stock needed to reach the breakeven point lowering the actual point
What happens in an organisation if there is a rise of decline in demand?
This has no effect on the line of the chart but you have to read the change off by drawing a vertical line.
What happens in an organisation if there is a rise in variable costs?
If the variable costs increased so would the total costs therefore the break even point would increase.
What happens in an organisation if there is a fall in fixed costs?
If company sales are falling, fixed costs might be lowered to make a break even point feasible.
What are the strengths and weaknesses of a breakeven analysis?
\+ simple to understand \+ estimate required stock for profits \+ assess impacts of calculated price changes \+ whether to purchase stock elsewhere - assumes that costs/profits/SPPU stays constant - estimated - only a snapshot doesn’t show trends - it is a simplification
What are the methods of working out break-even?
table
graph
formula
What is the break even point of a graph?
where the total cost line and total sales lines interest
What is included in a break-even graph?
fixed costs total revenue total costs margin of safety areas of profit and loss
What is the margin of safety?
difference between break-even output and actual output
actual output - break even output = margin of safety.
Where are the areas of profit and loss in a break-even graph?
profit = between the total costs and total revenue after the break even point loss = between the total revenue and total costs before the break even point
What is % change?
(difference/original) x100
What are positives of break-even analysis?
- estimates output level needed to produce and sell objectives
- assess the impact of planned price change
- make decisions whether to seek external help
- shows viability of a programme
- illustrates to owners important of low costs
- calculations are quick and easy
What are negatives of break-even analysis?
- Model is a simplification
- assumes the variable costs increase constantly
- assumes all sales are constant in pricing
- assumes all output is sold
- doesn’t take into account sale trends
- most business usually sell more than 1 product
- a planning aid rather than a decision making tool
- it is static
What are the axis on the break-even chart?
X - output
Y - price
How do you work out the maximum vertical value on break even chart?
Multiply the maximum output by the selling price per unit
What line is fixed costs?
A straight horizontal line through the point of y axis that represents the value of fixed costs
Why does the total cost line start at the edge of the fixed cost line?
As the line represents that at 0 output there is initial fixed costs
- this changes as the output increases because of variable cost.
What would a high safety margin result in?
It is less likely that the business would make a loss
What type of company is break-even analysis useful for?
Useful to small and newly established businesses
