Unit 32 - Break Even Flashcards
Def: break even
When a business generates enough revenue to cover its total costs
Def: break even chart
A graph containing the total cost and total revenue lines illustrating the break even output
Def: break even output
The output a business need to produce so that total revenue and cost are the same
Def: break even point
Point at which total revenue and total costs are the same
Def: contribution
Amount of money left over after variable costs have been subtracted from revenue. Money contributes towards fixed cost and profit
Def: margin of safety
Range of output between break even level and the current level of output over which a profit is made
Contribution formula
Contribution = selling price - variable cost
C = SP - VC
In money
Break even formula
BE = FC/C
FC fixed cost
C contribution
In units
Interpreting break even charts
BE is the units where total revenue and total costs have the same number of
Break even graph
Y axis $
X axis quantity
FC horizontal line
Total cost line begins at FC
Total revenue starts at 0
Where those two lines meet = BE
Above profit bellow loss
What does margin of safety show
The number of sales you can lose before making a loss
Margin of safety formula
Actual sales - break even level of sales
Uses of break even analysis
See what happens if price or cost goes up or down
Start ups : to figure out when they stop making a loss
Business plans - understand viability and risks
Margin of safety can act as a warning
Limitations of break even analysis
Assumes everything made is sold
Doesn’t take into account changing prices like discounts
Only as accurate as data its based on
Most businesses sell more than one product making it difficult to calculate
