Chapter 28: Break-Even Analysis (Version) Flashcards
Amortization
A cost associated with the falling in value of certain types of asset.
Break-even point
The level of output where total costs and total revenue are equal, resulting in neither profit nor loss.
Formula for break-even point
Fixed cost / (Selling price per unit - Variable cost per unit).
Break-even chart
A graph showing total cost and total revenue. The break-even point is where they intersect.
Interpreting a break-even chart
Below the break-even point: loss. Above the break-even point: profit.
Margin of safety
Amount of output available to be sold above the break-even point where the business makes a profit.
Effect of price increase
Total revenue line becomes steeper, shifting the break-even point left.
Effect of price decrease
Total revenue line flattens, shifting the break-even point right.
Effect of higher fixed costs
Total cost line moves up, shifting the break-even point right.
Effect of lower fixed costs
Total cost line moves down, shifting the break-even point left.
Effect of higher variable costs
Total cost line becomes steeper, shifting the break-even point right.
Effect of lower variable costs
Total cost line flattens, shifting the break-even point left.
Limitations of break-even analysis
Assumes total cost and total revenue are straight lines; assumes all output is sold; accuracy depends on data quality.
Stockpile
Large supply of goods that are being kept for use or possible use in the future.
Bulk buying
Buying goods in large quantities, which is usually cheaper than buying in small quantities.
