Management accounting - Break Even Analysis Flashcards
1
Q
define break even analysis?
A
sales value or production at which the business makes neither a profit nor a loss
2
Q
define contribution?
A
what a business needs to achieve from selling products in order to first cover its fixed costs, and thereafter, make a profit
3
Q
how to calculate contribution?
A
revenue - variable costs
4
Q
how to calculate profit?
A
contribution - fixed costs
5
Q
how is contribution measured?
A
Total contribution
Contribution per unit
6
Q
how to calculate total contribution?
A
total revenue - total variable costs
7
Q
how to calculate contribution per unit
A
selling price per unit - variable costs per unit
8
Q
how to calculate break even output?
A
fixed costs / contribution per unit
9
Q
what are the strengths of break even?
A
- tells entrepreneur how long it will take before they can make a profit
- margin of safety calculation shows sales forecast
- understand risks
- understand the viability of a business proposition, and also those who will lend money to or invest
10
Q
what are the limitations of break even?
A
- unrealistic assumptions - products are not sold at different levels of output; fixed costs vary when output changes
- sales are unlikely to be the same as output
- variable costs don’t stay the same
