Break even analysis Flashcards
Define breakeven
The point at which the business is neither making a profit or a loss
What is a fixed cost
A cost that does not change WITH OUTPUT
What is a variable cost
A cost that changes WITH OUTPUT
What are direct costs?
Costs that directly relate to the production of the product (e.g. sugar when making cakes)
What are indirect costs?
Costs that are not directly associated with production of products (e.g. advertising or rent)
How can we calculate general profit
Total revenue - total costs
How are losses represented on a PL sheet
In a bracket e.g (£3000)
What is contribution per unit
How much each unit contributes to paying off fixed costs
Sale price - Variable cost
How to calculate BEO
Fixed costs / Contribution per unit
How can total contribution be calculated
- Contribution per unit x Output
- Total Revenue - Total Variable Cost
What is margin of safety and how do I calculate it
MoS = Actual Output - BEO
Amount that sales can drop before at BEO
How is a BEO graph drawn
Draw and label Fixed Cost, Total Cost, and Total Revenue
Where Total Cost and Total Revenue meet is the BEO point
Why is BEO analysis useful (4-5)
- Let’s entrepreneur know how long it will take until profitability
- Can help application for investment
- MoS informs company about their risk
- Illustrates importance of keeping fixed costs low
- Calculations are quick and easy
Why is BEO analysis flawed
- Unrealistic assumptions (diverse products skew analysis)
- Sales may not equal output (some stock unsold)
- Different product prices complicate calculations
- Should be a tool, not sole indicator of strategy
