Business Finance Flashcards
What is break even?
The level of output or production at which a business’s sales generate just enough revenue to cover all its costs of production. At the break even point, a business makes neither a loss nor a profit.
Why is break even analysis used in a business? demand they can survive.
- Estimate levels of output they need to produce & sell
- Assess impact of price changes on profit & output needed to break even •Assess how changes in cost impact on profits and break even output •Determine margin of safety
What are fixed costs?
Costs that have to be paid regardless of the level of production and sales. e.g. fixed cost of factory to manufacture trainers £20,000 a month.
What are variable costs?
Costs dependent on production level. If production increases then costs like wages and raw materials increase.
What are the total costs?
The sum of the fixed and variable costs.
What is revenue?
The income that a business receives from selling goods or services. If each pair of trainers sells at £32.50 each and 1,000 pairs are sold, total revenue is £32,500.
What is the break even formula?
break even point= total fixed costs/contribution
On a break even chart, what do you plot on the horizontal (x) axis?
Output (units) e.g. number of CDs, number of lessons etc.
On a break even chart, what do you plot on the vertical (y) axis?
Costs and Revenue (£)
What type of line do you have for fixed costs and why?
Horizontal fixed costs line. It is horizontal because fixed costs don’t change with output.
What is the total costs line?
The fixed cost added to the variable cost gives the total cost.
How do you calculate variable costs?
Variable cost per unit x number of units = Total Variable Costs. e.g. The variable cost per unit is £2 and there are 2,000 units = £4,000.
How do you calculate revenue?
Sales Price x Number of Units
Where is the break even point?
Where the total revenue line crosses the total costs line is the break even point (ie costs and revenue are the same). Everything below this point is produced at a loss, and everything above it is produced at a profit.
What happens if total output and sales are greater than break even?
If total output and sales are greater than break even, then revenue is greater than cost so the business makes a profit.