2.2.3 Breakeven Flashcards
Breakeven
Where a business generates just enough revenue to cover it’s costs
Break-even point
the point at which total revenue and total costs are the same
At breakeven what is the business not making
Not making a profit or a loss.
Total revenue and Total costs are the same
Breakeven chart
A graph containing the total costs & the total revenue lines , illustrating the break-even output.
What are the 3 lines you must draw on the breakeven chart
FC (Fixed Costs)
TR (Total Revenue)
TC (Total Costs)
Steps to draw break even chart.
Read notes
Margin of Safety
difference between the break even point and current level of output.
Margin of safety - quote
‘How safe we are’
What will the margin of safety determine for the business
will determine the riskiness of the business
e.g low Margin of safety may mean that a business is close to making a loss
Margin of Safety formula?
What is it measured in?
Actual Output - Break even point
Measured in Units
Why is best for a business to operate with a high Margin of Safety?
if sales fall a business they may still be able to make a profit
Why is it risky for a business to operate with a Small Margin of Safety?
Because there is a risk that a business may make a loss if sales fall.
