Unit 3.3 - Break-even analysis Flashcards
1
Q
Break-even analysis
A
- Management tool used to calculate the level of sales needed to cover all costs of production
- Thereafter, further sales generate a positive safety margin, and hence profit for the business
2
Q
Break-even chart
A
Name given to the graph that shows a firm’s costs, revenues and profits (or loss) at various levels of output
3
Q
Break-even point
A
The position on a break-even chart where the total cost line intersects the total revenue line (i.e. where TC= TR)
4
Q
Break-even quantity
A
- The level of output that generates neither profit nor loss
- Shown on the x-axis on a break-even chart
5
Q
Contribution per unit (/unit contribution)
A
- The difference between the selling price of a product and its variable costs of production (i.e. P - AVC)
- The surplus goes towards paying fixed costs
6
Q
Margin of safety (MOS)
A
The difference between a firm’s level of demand and its break-even quantity
- A positive MOS means the firm can decrease output (sales volume) by that amount without making a loss
- A negative MOS means the firm is making a loss
7
Q
Profit
A
- The positive difference between a firm’s revenue and its costs
- On a break-even chart, profit is shown at all levels of output beyond the break-even quantity
8
Q
Special order decision
A
Occurs when a customer places an order at a price that differs from the normal price charged by the business
9
Q
Target price
A
The price set by a firm in order to reach break-even or a certain target profit
10
Q
Target profit
A
- The amount of surplus a firm intends to achieve, based on price and cost data
- It can been calculated by taking estimated total costs from expected sales revenues
- It can also even be identified from a break-even chart
11
Q
Total contribution
A
- The unit contribution (P-AVC) multiplied by the quantity of sales (Q) (i.e. total contribution = (P- AVC) x Q)
- It is, essentially, a firm’s gross profit
