Theme 2 - Break Even - 2.2.3 Flashcards
What is break-even ?
Break-even is the point at which Total revenue = Total costs so the business is making neither a profit nor a loss, TR = TC
What is break-even expressed as ?
It is expressed as an amount of output NOT a money value e.g. 250 units
Why is break even important ?
When a business starts up, the owner invests money in equipment etc. and therefore at the start of the business there will be little or no revenue and lots of costs but then the business will Stuart to trade and then better revenue levels can be made
The business will need to know at what point they break-even and cover their costs
What is the equation for Bep ( break even point ) ?
Bep = FC / SP - VC
FC = fixed cost
SP = selling price
VC = variable cost per item
What is Contribution ?
Contribution is the amount that each unit produced “contributes” towards the fixed costs of the business. And contribution is Selling price and variable cost.
For example if I run a barber shop then contribution would be the 10gbp that the customers give me would be the contribution as it contributes to me paying of my total costs- contribution is only when you are paying off your total cost as after the breaking even point it wouldn’t be contribution it would be profit
What is variable cost ?
Wages, cost of the material etc
Total cost =
Variable costs plus fixed costs
What is fixed costs ?
Fixed costs are things that don’t change in price for e.g. if I start running a barber shop then the fixed cost is all the chairs and the clippers etc and the variable costs would be like the wages of ppl working there and the shampoo to wash the customers hair etc
What is the equation for contribution ?
C = SP - VC
Contribution = selling price - variable cost
What is the formula for break even point ?
Bep = FC / C
Fixed cost
Contribution
What is margin of safety ?
The distance between the break even point and the total sales ( what they have actually sold )
What does the margin of safety show ?
It shows the number of sales that could be lost before the business makes a loss
Whats the formula for margin of safety ?
Actual sales - break-even level of sales
What are the uses and limitations of break-even analysis ?
Uses:
- Used as a “what if” tool to work out what happens if prices or costs go up
- Used by a business that is starting up to work out when they will stop making a loss
- Used by businesses to write their business plan
Limitations:
- Break-even assumes everything that is made is sold, this is not always the case
- Break-even does not take into account any sales discounts if customers buy in bulk
- The break-even calculations are only as accurate as the data they are based on - so if the data is a bit wrong then it messes up the whole break-even analysis
What are the types of budgets ?
- historical budgets
- zero based budgets
