Break - even analysis Flashcards
define the Break - even point
the point where a biz makes neither profit or loss.
give the equation to work out BEP
BEP = FC / (SP-VC)
define contribution
its the amount contributed from sales revenue towards paying fixed costs.
what is contribution per unit
it is the difference between selling price per unit and the variable cost per unit.
CPU = Sales Revenue - TVC
what calculation is contribution used for.
used to calculate the no. of items that needed to be sold to cover both variable and fixed costs.
what happens to the BEP when FC increases
BEP also increases
what happens to the BEP when FC decreases
BEP also decreases.
what happens to the BEP when VC increases
BEP also increases
what happens to the BEP when VC decreases
BEP also decreases.
what happens to the BEP when SP increases
the BEP decreases.
what happens to the BEP when SP decreases
the BEP increases.
describe the relationship between VC and FC with BEP.
VC and FC both have a directly proportional relationship with BEP.
(if one increases, so does the other and vice versa).
describe the realtionship between SP with BEP
SP and BEP are inversely proportional with each other..
(When one increases the other decreases and vice versa)
List the advantages of the contribution calculation
use the following ques to identify the 4 PROs -
1. conductability?
2. future
3. protecting the biz
4. when seeking help.
- quick and easy to conduct.
- helps biz’s to plan future.
- can be used to conduct what-if scenarios - to prevent the worst from happening.
- can be used to show bank managers or potential investors when seeking loans or investments.
list the disadvantages of the contribution calculation
Talk about the effect on the following -
1. selling price
2. variable costs
3. fixed costs.
- has no effect on the selling price - it wont change.
- variable costs stay the same at different levels of output.
- fixed costs remain the same at all levels of output.
