Break-Even Analysis Flashcards
sales revenue/turnover and formula
revenue is the money a business makes from sales
total revenue= quantity sold x selling price
fixed costs and examples
do not vary with output, they only change in the long run
•rent, management salaries, interest charges and depreciation
variable costs and examples
costs that vary in direct proportion to changes in output
•raw materials, fuel and labour
total costs
fixed costs + variable costs
semi-variable costs
costs that contain both fixed and variable elements, such as telephone charges
profit calculation
total revenue - total costs
contribution
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
what is contribution used to pay
the company’s overheads (fixed costs), once these have been covered additional contribution generates profit
contribution per unit formula
selling price per unit - variable costs per unit
direct costs and examples
Costs that arise specifically from the production of a product or the provision of a service
•rent on a shop
•materials or components
•direct labour
overheads/indirect costs and examples
costs not directly related to production
•employing the secretary/receptionist
•advertising costs
break-even
a diagram that shows the level of output where a business doesn’t make a profit nor a loss
break even calculation
fixed costs ÷ selling price per unit - variable cost per unit
advantages of break even
•easy visual means of analysing a business’ financial position at different levels of output (potential profitability)
•cheap to construct and can be carried out quickly
•profit or loss situation can be seen at a glance
•helpful for making decisions in ‘what if’ situations- can cope with changing circumstances with revenue and costs
•as part of a business plan can be helpful in gaining finance
•target setting made easier
•can identify the margin of safety- aids planning
limitations of break even
•often regarded as too simplistic- some assumptions are unrealistic
•it assumes all output is sold
•assumes that conditions remain unchanged- wages, prices and technology can all change suddenly
•relies on accurate data- often under or over-estimations are made
•assumes total revenue and cost curves are always linear
•allocating fixed costs in a multi-product business can be problematic
•fixed costs are often stepped
