Break-even Flashcards
What’s the break-even point (or break-even output)
The level of sales a business needs, to cover its total costs
- At break even point, total fixed costs + total variable costs = total revenue
What does it mean when sales are below break-even point
Costs are more than revenue, the business makes a loss
What does it mean when sales are above the break-even point
Revenue exceeds costs, the business makes a profit
Why should businesses do a break-even analysis
- To find the break-even point
- Tells them how much they will need to sell to break even
- Loaning money to the business, may need a break-even analysis as part of business plan to help them decide whether to lend money or not
- Established businesses preparing to launch new products use break-even analysis to work out how much profit they’re likely to make
What’s contribution per unit
Formula for it
The difference between the selling price of a product and the variable costs per unit (cost it takes to produce)
Contribution per unit= selling price - variable cost per unit
What is total contribution used for
Is used to pay fixed costs
- The amount left over is profit
What’s break-even point in terms of total contribution
Total contribution = fixed costs
If you know total fixed costs and contribution per unit, how do you calculate break-even point
Break-even point= Total fixed costs/ Contribution per unit
What do break even charts show
They show costs and revenue plotted against output.
Why do businesses use break even charts
To see how costs and revenue vary with different levels of output
What’s labelled on the x-axis and what’s labelled on the y-axis
X-axis = Output
Y-axis = Revenue and costs
What do the three lines drawn on the chart represent
Fixed costs
Total costs
Revenue
Where’s break-even point shown on the graph
How’s it shown
Where the revenue line crosses total costs line
It’s shown through the output
E.g. break even point= 150 units
You can use break-even chart to identify what
Profit or loss that would be made at a specified level of output
How can you find the profit or loss on a break-even chart
- You find value for total costs and for revenue at your chosen level of output
- Then subtract the total costs from the revenue
- If the answer is negative then it’s a loss, if its positive then its a profit