relationship between revenue and costs Flashcards
What is the formula for contribution?
Selling price - Variable cost per unit
What is the formula for break-even point?
Total fixed costs + Total variable costs = Total sales revenue
What is contribution?
The profit made on each product. It can be used to calculate the break-even point.
It does not consider fixed costs.
What is the margin of safety?
The difference between the actual level of output and the break-even level of output. It indicates how much sales can fall by before a firm reaches the break-even point.
What are the limitations of break-even analysis?
Assumptions are made:
- Selling price per unit is constant and does not change with quantity produced
- Variable cost per unit is the same
- Fixed costs do not change with output
- Everything produced is sold
However, these assumptions are not always true in reality, which limits the accuracy.
