IGCSE Calculations Revision: Break-even Calculations Flashcards
Define Variable Costs.
Costs that change as output increases
e.g. cost of materials
Define Fixed Costs.
Costs that DON’T change as out put increases
e.g. rent, equipment and machinery costs
How are total costs calculated?
Fixed Costs + Variable Costs
Define Average Costs.
Cost of producing a single unit of output.
How are average costs calculated?
Total output / Total cost
What are average costs used for?
Often used to calculate the selling price of a product.
As economies of scale increases ___________.
, average costs decrease
When does production of a product stop?
When the business is making a loss.
What must be paid before stopping the production of a product?
The fixed costs.
Why must the fixed costs be paid before stopping the production of a product?
Fixed costs will have to be paid, even if the production of a certain product stops.
What does break even analysis show?
It shows the output required to break-even.
Define break-even point.
When sales revenue = total costs, where no profit or loss is made (all costs are covered)
Explain how you would calculate the break-even point.
Contribution per unit = selling price (per unit) - variable cost (per unit)
Break-even point =
Fixed costs / Contribution per unit
How do you calculate the number of products to sell to reach target profit?
target profit / contribution per unit
How do you calculate the margin of safety?
Output - Break-even point
Draw a break even chart. Label all the lines.
4 a) i) Calculate the break-even level of output for DVP using the information in Appendix 2
ii) Calculate the margin of safety for DVP using the information in Appendix 2
iii) Identify four ways break-even analysis can be useful to a business.
