Break Even Flashcards
What is break even?
Break even is a method used to calculate the amount of sales needed to make neither a profit or a loss.
What is contribution
Contribution is the amount that a business needs to contribute to cover fixed costs and contribute to a net profit/loss after
Contribution formula
Contribution = Unit selling price - Variable costs
What is Margin of safety
The difference between the break even point and total business sales.
Formula for margin of saftey
Margin of saftey =
Business sales - Break even point
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Business sales
Target level of profit
The amount of profit a business expects to make during a certain period
Stepped fixed costs
When a business costs increase sharply and then flatten again as a result of acquiring a new facility for example.
How to construct a break even graph in full and what needs to be interpreted.
X axis = Output
Y axis = sales and cost of sales
Fixed costs = Horizontal line across graph (Fixed costs don’t change.)
Variable costs = Diagonal line ascending from left to right underneath fixed costs
Total costs = Diagonal line ascending from left to right above the fixed costs line
Sales = plotted ascending from left to right through the lines
Break even point = Line where total costs and total sales meet
Margin of safety = Difference between break even point and total sales
How to determine if the business is making a profit or a loss = Is the total sales line above the total costs line.
Break even formula
Fixed costs
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Contribution
