Business Finance Flashcards

1
Q

What is break even?

A

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.

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2
Q

Why is break even analysis used in a business? demand they can survive.

A
  • 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
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3
Q

What are fixed costs?

A

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.

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4
Q

What are variable costs?

A

Costs dependent on production level. If production increases then costs like wages and raw materials increase.

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5
Q

What are the total costs?

A

The sum of the fixed and variable costs.

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6
Q

What is revenue?

A

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.

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7
Q

What is the break even formula?

A

break even point= total fixed costs/contribution

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8
Q

On a break even chart, what do you plot on the horizontal (x) axis?

A

Output (units) e.g. number of CDs, number of lessons etc.

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9
Q

On a break even chart, what do you plot on the vertical (y) axis?

A

Costs and Revenue (£)

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10
Q

What type of line do you have for fixed costs and why?

A

Horizontal fixed costs line. It is horizontal because fixed costs don’t change with output.

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11
Q

What is the total costs line?

A

The fixed cost added to the variable cost gives the total cost.

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12
Q

How do you calculate variable costs?

A

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.

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13
Q

How do you calculate revenue?

A

Sales Price x Number of Units

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14
Q

Where is the break even point?

A

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.

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15
Q

What happens if total output and sales are greater than break even?

A

If total output and sales are greater than break even, then revenue is greater than cost so the business makes a profit.

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16
Q

What happens if total output and sales are equal to break even?

A

If total output and sales are equal to break even, then revenue equals total cost so the business breaks even.

17
Q

What happens if total output and sales are less than break even?

A

If total output and sales are less than break even, then revenue is less than total cost and so the business makes a loss.

18
Q

What is contribution?

A

Contribution is the difference between sales price and variable costs

19
Q

How do you calculate contribution? (formula)

A

Contribution = sales price - variable costs

20
Q

What is contribution used for?

A

Used to pay the fixed costs incurred by a firm.

21
Q

How is contribution calculated for the sale of a single product? (contribution per unit)

A

contribution per unit = selling price of one unit of output - variable cost of producing that unit (it’s this formula that’s useful when calculating the break even point)

22
Q

Why is it useful to find the contribution for the sale of a single product?

A

Avoids the need to divide up fixed costs between the firm’s various products. This assists entrepreneurs in assessing the financial performance of each of their products.

23
Q

Alternative method to calculate break even…

A

break even = fixed costs/contribution per unit

24
Q

How can break even help an entrepreneur to predict profit or loss?

A

If an entrepreneur believes that he can provide a achieve a certain level of sales they can use a break even chart to read off the expected profit or loss at various levels of output. Provides guidance as to whether it will be profitable or not.

25
Q

What is the margin of safety?

A

The amount by which a firm’s current level of output exceeds the level of output necessary to break even.

26
Q

What is the formula for the margin of safety?

A

Margin of safety = actual sales - break even point

27
Q

SARAH’S NEW RESTAURANT IS SUCCESSFUL AND ATTRACTS 600 CUSTOMERS EACH MONTH. HER BREAK EVEN POINT IS 400 CUSTOMERS EACH MONTH? WHAT IS THE MARGIN OF SAFETY AND WHAT DOES THIS MEAN?

A

Her restaurant could lose 200 customers monthly before it began to make a loss.

28
Q

What is the impact on break even output if there is a rise in variable costs?

A

A greater output is necessary to break even. A greater revenue is also necessary (more customers/sales) to break even.

29
Q

What is the impact on break even output if there is a fall in variable costs?

A

Smaller output required to break even. Smaller number of customers needed to cover costs (less sales).

30
Q

What is the impact on break even output if there is a rise in fixed costs?

A

Greater output to break even. Business incurrs higher costs, so more sales needed to cover costs and break even.

31
Q

What is the impact on break even output if there is a fall in fixed costs?

A

Smaller output is necessary to break even. Businesses costs are lower which means fewer sales are required to break even.

32
Q

What is the impact on break even output if there is a rise in selling price?

A

Lower output required to break even. Each sale provides the business with greater revenue while costs are unaltered. So fewer sales necessary to break even.

33
Q

What is the impact on break even output if there is fall in selling price?

A

Higher output required to break even. Each sale earns the business less revenue so more sales will be required to earn sufficient revenue to break even.

34
Q

Why is it important for a business that operates in an environment which alters frequently to conduct a break even analysis? (what if analysis?) planning and decision making.

A

It is too simplistic to assume that costs will remain constant or prices in their markets will not alter over a period of time. Using break even analysis for a number of ‘what if?’ scenarios can increase the value of the technique in the financial

35
Q

Why should break even analysis be supported by market research?

A

For example, Sarah knows that she needs 400 diners each month if she is to break even. If her market research reveals this is likely, this is a major reason to go ahead. However, if it is lower, the enterprise is unlikely to be profitable.