Breakeven 2.2.3 Flashcards
what does contribution focus on
the profit made on individual products
how to calculate contribution
total sales - total variable costs
how to calculate contribution per unit
selling price per unit - variable costs per unit
how to calculate total contribution
contribution per unit * number of units sold
how to calculate profit using contribution
contribution - fixed costs
when is a business said to ‘break even’
when it is earning enough sales to cover all its costs
how to calculate breakeven using a table
find the point or middle point where profit is 0, then look to the output
how to calculate breakeven using a chart
put output on the x axis and sales + costs on the y axis
add the fixed costs line
add the variable costs line
add the total costs line
draw a total sales line from the origin to the top corner, where that line meets the total costs line is the breakeven point
what is the margin of safety
the difference between the actual output and the break-even output
what is the breakeven formula
fixed costs / (selling price - variable costs per unit)
how will a higher selling price affect the contribution per unit and breakeven output
higher contribution
lower breakeven
how will a higher variable cost per unit affect the contribution per unit and breakeven output
lower contribution
higher breakeven
how will an increase in fixed costs affect the contribution per unit and breakeven output
will not change contribution
higher breakeven
strengths of breakeven analysis
- focuses on what output is required to reach profitability
- easy to understand the risks of a business idea
- illustrates the importance of low fixed costs
- relatively quick and easy
limitations of breakeven analysis
- unrealistic
- sales are unlikely to be the same as output
- variable costs do not always stay the same
- most business’s sell more than 1 product
