Breakeven (2.2.3) Flashcards
What can be used to work out the Break even point?
Contribution value
What is the Break even point?
Where a total revenue earned for a product is exactly equal to its total costs and where the business is making neither a profit or loss
What’s the equation for Breakeven?
Breakeven= Fixed costs / Selling price-Variable Cost per unit
What is the Selling Price-Variable Cost per unit also called?
Contribution per unit
What’s the equation for Total Contribution?
Total Contribution= Contribution per unit x Quantity
What is the margin of safety?
Is the different between the actual level of output of a business and its breakeven level of output
What’s the equation for Margin of Safety?
Actual sales- Break even point
What is a break even chart?
It’s a visual representation of the break even point
What is it used to identify?
-Fixed Costs, Total Costs and Revenue over a range of output
-The breakeven point
-Profit or Loss made at each level of output
-The margin of safety
Where is the Breakeven Point on a graph?
Where the Total Revenue and Total Costs lines overlap
What does the Breakeven graph look like?
-The Fixed Costs do not change as output increases (straight line across)
-The Total costs start at where the FC line is on y axis and slowly increases
-The Revenue starts at the axis and goes up
Where is the Profit and Margin of Safety on the graph?
-The Margin of safety is the difference between the Break even level of output and actual output
-The Profit is the point after the BEP in between TC and Revenue
What are the limitations of Breakeven analysis?
-Is less useful where businesses produce more than one product
-Accuracy of Breakeven analysis relies upon quality of data used in calculations
-Assumes that all output is sold
-Charts can be easily amended when conditions change
-Revenue +TC do not always have a linear relationship with output
