(E2) Break-Even Analysis Flashcards
What is break-even analysis?
The point at which a business’s costs match the money it receives from sales
Types of Costs
- variable
- semi-variable
- fixed
- total
What are variable costs?
Costs that increases when the business increases output e.g. raw materials
Variable Cost Formula
total variable costs = variable cost per unit x quantity
What are semi-variable costs?
Combination of fixed costs and costs that become variable after a certain level of output is reached
What are fixed costs?
Costs that happen regardless of a business’s output e.g. taxes
Total Cost Formula
total costs = fixed costs + variable costs + semi-variable costs
Total Revenue Formula
total revenue = quantity of goods sold x selling price per unit
What is selling price per unit?
The amount paid by each customer for each item brought
Contribution Per Unit Formula
contribution per unit = selling price - variable cost per unit
Total Contribution Formula
total contribution = contribution per unit x number of unit sold
Break-Even Point Formula
break-even point = fixed costs/contribution per unit
What is margin of safety?
The value of units sold above the break-even point
Margin of Safety Formula
margin of safety = sales - break-even level of output
Months to Break Even Formula
months to break even = break-even units/units produced per month
