Break even analysis Flashcards
what is sales revenue/turnover?
Revenue is the money a business makes from sales. The total amount of money a business receives from its sales is called total revenue.
Total revenue = quantity sold x selling price
how to calculate profit?
Total Revenue – Total Costs
what are the types of costs? and how to calculate total costs?
Fixed Costs: Do not vary with output. Fixed costs only change in the long run.
Variable Costs: Costs that vary in direct proportion to changes in output.
Semi-Variable Costs: Costs that contain both fixed and variable elements
Total Costs: Fixed Costs + Variable Costs
what are direct costs?
Costs that arise specifically from the production of a product or the provision of a service.
Examples of direct costs include:
* rent on a shop
* materials or components
* direct labour
what are overheads/ indirect costs?
Costs not directly related to production.
Examples of overheads costs include:
* employing the secretary or receptionist
* advertising costs.
what is contribution and how do you calculate it?
It is the difference between the income generated from sales and the variable costs of producing the goods to generate those sales. This allows a business to analyse whether each of its products covers its own variable costs.
Contribution per unit = Selling Price per unit – Variable Costs per unit
what is break even and how do you calculate it?
A diagram that shows the level of output where a business does not make a profit nor a loss
fixed costs / (selling price per unit - variable costs per unit)
what are the advantages of break even?
-Easy visual means of analysing a business’ financial position at different levels of output - gives a valuable rule-of-thumb guide to potential profitability.
-Cheap to construct and can be carried out
quickly.
-target setting made easier
what are the disadvantages of break even?
-Often regarded as too simplistic as some assumptions are unrealistic.
-It assumes all output is sold, which is often not the case.
-Assumes that conditions remain unchanged – wages, prices and technology can all change suddenly.
what is the margin of safety and how do you calculate it?
The margin of safety shows how much a producer can reduce output before the business starts to make a loss.
Selected level of business activity – Break-even Point
