Break-Even Analysis Flashcards
What is the break-even output?
The level of sales a business needs to cover its costs
What does costs equal at the break-even point?
Revenue
When sales are below the break-even output and costs are more than revenue, what does the business make?
A loss
When sales are above the break-even output and revenue exceeds costs, what does the business make?
A profit
Why should new businesses always do a break-even analysis?
To find the break-even output
What does the break-even output tell the business?
How much they will need to sell to break even
Why do established businesses use break-even analysis?
To work out how much profit they are likely to make, and to predict cash-flow
What is contribution?
The difference between the selling price of a product and the variable costs it takes to produce it
How do you calculate contribution per unit?
Selling price per unit minus variable costs per unit
How do you calculate total contribution?
Number of units sold x CPU
Total revenue - total variable costs
What is contribution used to pay?
Fixed costs
What is the contribution left over after fixed costs called?
Profit
How do you calculate break-even output?
Fixed costs divided by CPU
What do break-even charts show?
Costs and revenue plotted against output
What is margin of safety?
The amount between actual output and break even
