break-even analysis Flashcards
what is the break-even point
the level of output where total revenues equal total costs, with no profit or loss
what is a break-even chart
a graph showing total costs and total revenues
what is the margin of safety
the amount of output sold above the break-even point where the business makes a profit
how is the break-even point calculated
break-even point = fixed costs ÷ (selling price − variable cost per unit)
what happens to the total revenue line if price increases
the total revenue line becomes steeper, and the break-even point shifts left
what does the break-even point on a chart represent
the intersection of total costs and total revenues
what happens at output levels below the break-even point
the business incurs a loss
what happens at output levels above the break-even point
the business earns a profit
how is the margin of safety calculated
margin of safety = current output − break-even output
what happens to the total revenue line if price decreases
the total revenue line becomes flatter, and the break-even point shifts right
what happens to the total cost line if fixed costs increase
the total cost line shifts upward, and the break-even point shifts right
what happens to the total cost line if fixed costs decrease
the total cost line shifts downward, and the break-even point shifts left
what happens to the total cost line if variable costs increase
the total cost line becomes steeper, and the break-even point shifts right
what happens to the total cost line if variable costs decrease
the total cost line becomes flatter, and the break-even point shifts left
what are the limitations of break-even charts
accuracy depends on the quality of data used, assumes all goods are sold, ignoring unsold stock, costs and revenues are shown as straight lines, which may not be accurate
