Themes 2 AND 3 Flashcards
What is the formula for break even & contribution
Break even= Fixed costs / contribution per unit
Contribution= Selling price - Variable cost per unit
Uses of break even analysis
- Shows whether or not a business idea is viable and profitable
- Identify level of output and sales neccesary to make a profit
- Assess changes in level of production
Limitations to break even
- Unrealistic assumptions- products not sold at same price
- Sales less likely to be the same as output
- Variable costs fluctuate.
Formula for total contribution
Total output x contribution per unit
Strengths of break even analysis
- Shows business what output is needed to make a profit
- Helps entrepreneur understand level of risk involved when starting the business
- Calculations are quick and easy
- Ensures the business whether or not they are going to need loans or potential investors.
what is contribution?
what a business needs to achieve from selling its products in order to cover its fixed costs so they can start to make a profit.
What would happen to variable costs if business decided to use a cheaper supplier?
VC would decrease lowering b/e point as it would lower the total costs
what would happen to an increase in rent for a building for a mcdonalds restraunt, how would this affect mcdonalds.
Increase in rent leads to higher variable costs increasing the total costs for the business making the b/e point higher
What is the margin of safety
This is the difference between the b/e point and the current level of output
Formula for profit
margin of safety X contribution per unit
formula for margin of safety
Current level of output - Break/even point
what is investment appraisal
the process of analysing whether investement projects are worthwhile.
What is payback
method used to calculate length of time for an investment to recoup its original cost
Why is payback useful for firms
Useful for firms who need quick return and may be facing liquidity issues
How to calculate payback if it falls between two years
Amount remaining to recover / Amount recovered following year X100
