Break even Flashcards
Define the term breakeven.
The point at which revenue equals cost so the business is making neither a profit nor a loss.
Total revenue = total costs
This is expressed as an amount of output not a money value eg 250 units
What is contribution?
The returns a business makes from each unit of product sold and whether that return is enough to allow the business to make money overall after taking account of its fixed costs.
What is the formula for contribution?
C = selling price - variable costs
What is the break-even formula?
Fixed costs / contribution
Where is the break even point on a graph?
Where total costs and total revenue cross or are equal/
What is does a margin of safety show?
The margin of safety calculation shows the number of sales that could be lost before the business makes a loss
What is the formula for margin of safety?
Actual sales - breakeven level of sales
This is expressed in units, not money
What are the strengths of using breakeven analysis?
Used as a “what if?” tool to work out what happens if prices or costs go up
Used by a business that is starting up to work out when they will stop making a loss
Used by business to write their business plan
What are the limitations of using breakeven analysis?
Break-even assumes everything that is made is sold, this is not always the case
It’s only helpful to see “what if”, if you use it in conjunction with a supply/demand graph, because increasing the price would also reduce demand.
The break-even calculations are only accurate if the data they are based on is accurate and sometimes, businesses don’t account for fluctuating costs.
Break-even does not take into account any sales discounts if customers buy in bulk
