Break-even Analysis Flashcards
What does break-even analysis tell a business?
How many products(or services) they need to sell in order to cover their costs. It’s normally the bare minimum a business will aim to achieve.
What happens when a business breaks even?
The total revenue is equal to the total costs.
How do you calculate contribution per unit?
Selling price per unit - variable costs per unit
What a really is contribution per unit?
The difference between selling price per unit and the variable costs per unit — this goes towards covering the businesses fixed costs.
What is the equation for break-even output?
Fixed costs/contribution per unit
What happens if the answer of break-even output has decimal points?
The answer is rounded up to the next whole number
How do we calculate profit from a break-even chart?
Profit = (actual sales — break-even output) x contribution per unit.
What goes on the vertical axis of a break-even chart?
Level of costs and revenue.
What goes on a horizontal axis of a break-even chart?
Level of output and sales.
How do you find profit and loss at different levels of output?
Measure the difference between the revenue line and the total costs line at the given level of output.
What is the question for margin of safety?
Actual sales — break-even level.
Why is a small margin of safety dangerous for a business?
Because an unexpected drop in sales affects their business.
When can ‘what if’ analysis be used?
Can be used for break-even, to see different outcomes based on different figures. This gives managers a decent idea of the range of possible outcomes that might occur.
