2.2.3 Break-Even Flashcards
1
Q
what is the break even point
A
- the level of sales a business needs to make to cover its total costs
- being below the break-even point means that the business is making a loss
- being above the break even point mean that the business is making a profit
2
Q
what is break even analysis
A
- shows the break-even point, how much a business needs to generate in sales revenue to cover their costs
3
Q
why would a new business use break even analysis
A
- used to see when the business will break even and start making a profit
- it is included in a business plan
- can be used to obtain finance
4
Q
why would an established business use break-even analysis
A
- if a business is launching a new product it allows them to work out how much profit they are likely to make
- allows them to predict the impact of the new activity on cash flow
5
Q
how do you work out the break even point
A
total fixed costs / contribution per unit
- break even is then expressed in a number of units
this is how many units need to be sold to break even - number should be rounded UP to the nearest whole number
6
Q
NOTE for your exams you may have to interpret a break even chart
A
7
Q
what is the margin of safety
A
- this is how much sales can decrease before a business starts making a loss
margin of safety = actual output - break even output - if the margin of safety is small a business may want to either lower costs or increase sales revenue
8
Q
what are the advantages of break-even analysis
A
+ easy
+ quick, doesn’t take up management time
+ forecast how changes in sales revenue will affect costs, and profit
+ helps a business obtain finance
+ can support business decision making
9
Q
what are the disadvantages of break-even analysis
A
- assumes that variable costs rise in a linear fashion but this isn’t true, businesses can get discounts when bulk buying
- break even analysis can be more complicated when a business sells multiple products
- relies on accurate data
- doesn’t consider wastage
