Break Even Analysis Flashcards
what is break even point
when income is exactly equal to
expenditure, thus showing neither profit nor loss.
what can costs be categorized into
Variable costs
Fixed costs
Semi-variable costs
Total costs
what are variable costs
costs that vary with the level of output.
The more products a business makes the higher the cost of raw materials
will be.
what are fixed costs
Do not vary with the level of output.
regardless of how many items a business produces they will still need to pay the same amount of rent for their premises.
what are semi variable costs
costs are composed of a mixture of both fixed and variable components.
Costs are fixed for a set level of
production or consumption and become variable after this
level is exceeded.
what are total costs
the total amount of your fixed and variable costs added together.
what can sales be categorized into
Total revenue
Selling price per unit
Sales in value
Sales in volume
what is total revenue
total amount of money coming into the business from the sale of its products or services.
what is selling price per unit
The amount a customer pays per unit bought.
what is sales in value
the total amount of sales made
expressed as a monetary value such as ‘£’.
what is sales in volume
This is the amount of sales expressed as a quantity i.e. ‘1000 units were sold’.
how can break even be used for planning
Can be used as part of a business plan to demonstrate to lenders what point the business will break-even and their capacity for profit.
Can be used to plan pricing strategies as the price set can impact the break-even point
either positively or negatively.
how can break even be used for monitoring
Monitor the impact of changing
prices or changes in costs.
By monitoring the changes in
revenue and costs it allows the
business to take action and
rectify the problem.
how can break even be used for control
to control costs and see if they
are being kept within budget.
Motivate employees to achieve targets that
have been set and controlled based on the
break-even point.
Control pricing and ensure discounts given do
not hinder progress to breaking even.
how can break even be used for target setting
targets can be given to individuals,
Set targets based on expenditure so that expenditure does not negatively impact progress toward breaking even.
Set production targets that will enable a certain level of profit to be made once the break-even point has been reached.
