Break Even Theory Flashcards
Definition of Break Even
Break Even is when we are not making a profit or a loss. Our Total Revenue is equal to our Total Costs.
Fixed Costs
Costs which remain the same regardless of units produced or sold eg rent and rates.
Variable Costs
These Costs change directly with production ie they will increase as units produced or sold increase eg materials and production wages.
Contribution
This is our Selling Price per unit - Variable Costs per unit
OR
Sales Revenue - Total Variable Costs
The Contribution goes towards covering the Fixed Costs. Once the Fixed Costs are covered by the Contribution then the business will start to make profit.
Margin of Safety
This is our Current Production and Sales units level - Break Even units.
This is the extra units the business is producing and selling above and beyond the Break Even Units.
It can be shown in units and Sales value.
What is the formula for contribution?
Selling Price per unit - Variable cost per unit = £…
What is the formula for Break Even Point in Units?
Fixed costs / Selling Price per unit - Variable cost per unit = Fixed Costs / Contribution = …units
What is the formula for Break Even Point in Sales Value?
Break Even Point in units x Selling Price = £…
What’s the formula for Profit achieved at a certain unit level?
Units x Contribution - Fixed Costs = £…
What’s the formula to find out how many units you need to sell to make a certain profit level?
Fixed Costs + Profit Required / Contribution = …units
What is the formula for The margin of safety in units?
Current production or sales units - Break Even units = …units
What is the formula for Margin of Safety in Sales Value?
Margin of Safety in units (as calculated above) x Selling Price = £…
