Break Even Analysis Flashcards
What is break even analysis?
How changes in sales volume impact profit.
Looking at when there is no profit or loss made.
Where are income equals our outgoings
The best approach for this is to separate outfits costs and focus on contribution rather than profit
What is contribution?
The portion of sales revenue that is not used by variable costs and so contributes towards fixed costs and then profit
Contribution = revenue - variable Costs
Contribution per unit = selling price - variable cost per unit
Contribution sales (c/s) ratio = contribution per unit / selling price per unit
You want the c/s ratio to be as high as possible as this means higher profit in sale
What is the brake even point?
This is the point at which neither a profit or loss is made so total revenue will only just cover total costs and the total contribution will just cover the total fix costs
Breakeven revenue = total fixed costs/ C/S ratio
What is the margin of safety?
This can be units or percentage of budgeted sales.
It is a difference between the break even point of sales and total budgeted sales.
We want this to be high
Margin of safety = total budget sales - break even point of sales
What is the target profit?
This is when the organisation has a target level of profit to achieve
We can calculate the level of activity needed to earn required profit by :
Total fixed costs + required profit / contribution per unit
What assumptions are used in break even analysis?
- Constant price, variable cost per unit, contribution and fix costs
- All costs can be divided into fixed and variable elements
- Efficiency and productivity are unchanged
- The sales mix is maintained as total volume changes
