Unit 5: Break Even Analysis + Decision Trees Flashcards
What is Break Even?
Break even is the point in a business where its total revenue meets its total costs. The business is not making a profit or loss.
What is Fixed Cost?
Costs that do not change with the level of output, they remain constant no matter how much a business produces.
eg: rent, insurance and utility bills
What is Variable Cost?
Costs that directly change with the level of output, the more a business produces/sells, the higher the costs become.
eg: raw materials, packaging and salaries for hourly workers
What are advantages of break even analysis
- it helps businesses manage their expenses and maintain profitability
- it is straightforward and easy to understand which makes it a useful tool for business owners and managers to make quick decisions
What are disadvantages of break even analysis
- it assumes that prices and costs remain constant, when they may fluctuate in real world markets
- it can be oversimplified as they don’t consider factors such as market competition and product differentiation which may impact sales
What is the formula for total revenue?
TR = Selling price per unit x number of units sold
What is the formula of total cost?
TC = Fixed Cost + (Variable cost x Number of units sold)
What is the formula for break even point?
BEP = fixed cost / selling price per unit + variable cost per unit
what is the formula to calculate profit or loss?
Total revenue - total costs
What are advantages of decision trees?
- Highlights the best outcome and identifies the most profitable choice
- Helps identify risks and outcomes systematically
- Eay to. understand and communicate decisions
What are disadvantages of decision trees?
- Difficult to manage too many outcomes or scenarios
- Inaccurate probability can lead to poor decisions
- Ignores qualitive factors and real world complexities
