strengths and limitations of break-even analysis Flashcards
strengths:
what are known?
fixed and variable costs
strengths:
what could be calculated?
the potential sales revenue
strengths:
what is needed to make a profit
The number of items needed to be sold in order to make a profit is known
strengths:
why would an enterprise take action?
to increase profit, for example by reducing costs
strengths:
what can the best price be set for?
the product
strengths:
what will enterprises know?
which are the most profitable products to make
strengths:
what is known? (MOS)
margin of safety
risks of not using break-even analysis:
what does it mean if costs are unknown?
action cannot be taken to reduce them if they are too high. For example, if inventory (stock) is sold below cost price, the enterprise will make a loss.
risks of not using break-even analysis:
if an enterprise sells too low, how does it make a loss?
The enterprise will not know how many items need to be sold in order to make a profit
risks of not using break-even analysis:
what does setting the price of products result in?
as it is guesswork, it could result in too high or too low a price
risks of not using break-even analysis:
what will not be known?
the margin of safety
limitations:
what does a break-even analaysis make?
a number of assumptions so may not be accurate
limitations:
what does a break-even analysis assume that are all sold?
all inventory (stocks)
limitations:
what does a break-even analysis assume that remains the same?
costs
limitations:
what does a break-even analysis assume that move in a straight line?
revenue and costs
limitations:
what does a break-even analysis assume that the enterprise only produces?
one product
limitations:
what may the actual situation of all inventory not being able to be all sold?
total revenue may be lower than planned
limitations:
what will be the actual situation be of when costs will increase?
Workers may overtime and wages
limitations:
what will be the actual situation when costs decrease?
The enterprise may receive a discount for
buying raw matenals in bulk
limitations:
what will be the actual situation when there are several similar products?
it may be more difficult to break-even
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