Break-even analysis Flashcards
Break-even
is the point at which a business is not making a profit or loss, means money being received from sales is the same as the money being spent on costs
Types of costs in a break even chart
- variable costs - vary with the level of output e.g. raw materials
- semi-variable costs - part of cost stays the same and part varies in relation to the degree of business activity.
- fixed costs - do not vary with output e.g. output
Total cost(formula)
variable costs + fixed costs
variable costs per unit(formula)
total variable costs/ quantity in units
total variable cost(formula)
quantity in units x variable cost per unit
Total revenue/sales revenue(formula)
the total amount of money coming in from sales.
total revenue = quantity sold x selling price per unit
Selling price per unit
the amount a customer pays for each unit sold
Break-even level of output (units)(formula)
fixed costs/contribution per unit
Contribution per unit(formula)
selling price per unit - variable costs per unit
Margin of safety (units)
(formula)
the actual number of units sold over and above the break even point.
actual/planned sales in units - break even level of output
Break even chart
This plots the costs and sales at each unit of output. Break even point is where the total cost line crosses the total revenue line. Can also be used to calculate margin of safety and profit or loss at different levels of output.
Total contribution(formula)
sales revenue - total variable costs
Break even point in level of value(formula)
break even in units x selling price per unit
Margin of safety (value)(formula)
margin of safety in units x selling price per unit
Break even for planning
Sets budgets for amount of sales necessary and costs, forms part of a business plan to show at what point the business will start to make a profit, informs pricing decisions.
Break even for monitoring
Monitor progress towards achieving break even point, identify changes to selling price of costs, takes corrective action if target look unlikely.
Break even for control
Keeps cost within budget, motivates employees, manage sales accounts
Break even for target setting
Set sales targets for individual employees, teams or products, set expenditure budgets, set profit budgets based upon sales targets and cost targets.
Advantages of break even
- business knows how many items it must sell in order to break even
- informs decisions on what price to charge
- identifies fixed and variable costs
- can identify if costs are too high allowing the business to look for ways of lowering costs
- can set targets to motivate employees
- easy way to calculate profit or loss at different levels of output.
Disadvantages of break even
- does not take into account of variations in costs or selling price
- forecast sales may not be achieved and hence, even though the break even point is know it may not be achieved
- target set may be too high, creating stress
profit calculation
total revenue - total costs
