Breakeven Analysis Flashcards
What is breakeven analysis?
A tool that is used to identify how many products a business needs to sell before it can start making a product.
What is contribution?
Looks at the profit made on individual products, and is used in calculating breakeven.
How do you calculate contribution?
Total sales - total variable costs
OR
contribution per unit x number of units sold
How do you calculate contribution per unit?
Selling price per unit - variable costs per unit
How do you calculate profit?
Contribution - fixed costs
What assumptions are made when doing breakeven analysis?
• selling price stays the same, regardless of amount produced.
• variable costs vary in direct proportion to output.
• all output is sold.
• fixed costs do not vary with output - they stay the same.
How do you calculate breakeven output?
Fixed costs / contribution per unit
How do you calculate margin of safety?
Actual output - breakeven output
How does a higher selling price affect
a.) CPU?
b.) breakeven output?
a.) higher
b.) lower
How does lower selling price affect
a.) CPU?
b.) breakeven output?
a.) lower
b.) higher
How does higher variable cost per unit affect
a.) CPU?
b.) breakeven output?
a.) lower
b.) higher
How does lower variable cost per unit affect
a.) CPU?
b.) breakeven output?
a.) higher
b.) lower
How does increase in fixed costs affect
a.) CPU?
b.) breakeven output?
a.) no change
b.) higher
How does decrease in fixed costs affect
a.) CPU?
b.) breakeven output?
a.) no change
b.) lower
What are some strengths of breakeven analysis?
• helps management and finance providers better understand the viability and risk of a business or business idea.
• margin of safety calculation shows how much a sales forecast can prove over optimistic before losses are incurred.
• illustrates the importance of keeping fixed costs to a minimum.
• calculations are quick and easy.
