U5: Break Even Analysis Flashcards
What is Break Even Analysis?
Break even analysis compares a firm’s revenue with its fixed and variable costs to identify the minimum level of sales needed to cover costs
What is the Break Even Output formula?
fixed costs/ (selling price per unit - variable cost per unit)
What is Contribution?
Contribution is price minus variable costs
What contributes to ‘paying off’ the fixed costs a business has?
When a product is sold the business gains an amount of money which contributes to ‘paying off’ the fixed costs.
What is the Contribution Per Unit formula?
selling price per unit minus variable costs per unit
What is the Total Contribution formula?
contribution per unit X number of units sold
How is total contribution a useful shortcut to calculate profit?
Profit = Total Contribution - Fixed Costs
What is Margin of Safety?
- Amount demand can fall before firm makes a loss
What is the Margin of Safety formula?
Sales minus break - even point
How changes in business circumstances affect break even chart?
Cause: Extra advertising - Effect: fixed cost rises, total costs rise, break even point rises
Cause
What are the Strengths in Break Even charts?
- simple to understand
- good for small and new businesses
- estimates output needed to meet profit
- impact of price change upon profit
- produce own products or source
What are the Weaknesses in Break Even charts?
- simplification
- assumes variable cost increase constantly. Ignores bulk buying or improved negotiated price
- assumes sells all output at same price
- assumes all output sold
