Unit 3.3 Break Even Flashcards
Definition of the BREAKING EVEN point..
Where the total revenue exactly matches the total costs and the business is not making a loss or a profit
Definition of break-even
The level of output where total costs=total revenue
What happens when more items are sold?
Total revenue increases more costs are covered
As costs rise…
break even point increases
As costs decrease…
break even point decreases
As selling price increases
break even point goes down
Break even point doesn’t mean that profits are guaranteed from there but it does mean…
costs are covered
How to work out the margin of safety?
Total output-breakeven point
By establishing the breakeven point..
businesses are able to plan the levels of production they need to be profitable BUT this is once they are WITHIN THE MARGIN OF SAFETY
There is a higher when total costs are much less than total revenue
Benefits fo breakeven analysis tool..
useful tool for working out the minimum sales required to ensure a loss isn’t made
can set sales targets fro staff, helps to improve productivity and can measure performance of staff BUT THIS IS ONLY A FORECAST
The breakeven analysis tool is only really useful when
used with other forecasting techniques such as market research
What are the problems with the tool?
It is only a forecast
it makes assumptions about various factors… 3 FOR EXAMPLE, all the units are sold/ forecasts are reliable/ external environment is safe
What could happen to make it take longer for a business to reach the break even point than they had anticipated?
Economic recession
Rivals enter the market
