Break Even Assesment Flashcards
Revenue
The money a business receives from seeking products and services
Variable costs
Costs that change as output changes (e.g piece rate of workers or VAT paid on the number of goods sold)
Average costs
The cost for each unit of a product that a business sells
Total cost/amount sold
Fixed costs
Costs that remains the same regardless of output
Total costs
Total Fixed costs + total variable costs
Why is knowing the average cost useful
It allows you to conduct selling prices as you then know how much each unit costs you individually
4 ways to reduce average cost
Reduce amount paid for materials (economies of scale/negotiations)
Reduce wage costs
Increase efficiency of production (eg change from batch to flow)
Use JIT
What is the break even point on the graph
Where sales revenue and total costs cross over
Break even formula
Break-even output = total fixed costs / (selling price-variable cost per unit)
Margin of safety
The difference between the actual level of output and the break-even output
Margin of safety formula
Actual sales - break-even sales
Benefits of break even
Helps to set a sales target
Helps to get loans as you can convince banks that you will be able to repay them
Used to make decisions such as whether to increase prices or reduce costs
Disadvantages of break even
Forecast figures may turn out differently
Figures only relate to one product, a business usually sells more than one products
It assumes all output is sold
