5.4 Break-even Flashcards
(44 cards)
What is the concept of break-even?
A business will break even when the revenue it earns from sales is equal to the cost of selling that output
The output at which revenue is equal to cost is called the break-even quantity.
What is the break-even quantity?
The amount a business must sell to earn enough revenue to just cover its costs so it does not make a profit or a loss
This concept can be applied to a business as a whole or to just one product that the business sells.
How can the break-even output be calculated?
In three ways
Specific methods for calculation are not provided in the text.
True or False: A business is making a profit at the break-even point.
False
At the break-even point, the business is neither making a profit nor a loss.
What is breakeven analysis?
A tool to determine when total sales revenue equals total costs, resulting in no profit or loss.
Useful for setting sales targets for small businesses.
What occurs when a business sells more than its breakeven level of sales?
The business makes a profit.
This indicates successful sales performance beyond minimum requirements.
What happens if a business sells less than its breakeven level of sales?
The business incurs a loss.
This highlights the importance of meeting sales targets to avoid financial deficits.
When does a business breakeven?
When total sales revenue equals total costs.
This point is critical for financial planning and sustainability.
Why is breakeven analysis useful for small businesses?
It helps in setting sales targets (objectives).
Small businesses can use this analysis to gauge performance and make informed decisions.
What is the first step in working out breakeven?
You must revise the calculation method
Understanding the calculation method is crucial for determining breakeven points.
What are fixed costs?
Costs that do not change regardless of the level of production or sales
Fixed costs remain constant, such as rent or salaries.
What is the formula for calculating breakeven?
(Selling price - variable cost per unit)
This formula helps determine the contribution margin per unit.
Fill in the blank: The breakeven point is reached when total revenue equals _______.
total costs
At breakeven, a business does not make a profit or a loss.
How do you calculate break-even output?
What is the formula for calculating break-even output?
Break-even output = Total fixed costs / Contribution per unit
How is the contribution per unit calculated?
Contribution per unit = Price - Variable cost per unit
Fill in the blank: Break-even output can also be expressed as Total fixed costs divided by _______.
Contribution per unit
True or False: The contribution per unit is the same as the total fixed costs.
False
What are the components needed to calculate break-even output?
- Total fixed costs
- Contribution per unit
What happens to the break even point if costs go up?
It will increase
The break even point is the level of sales at which total revenues equal total costs.
What happens to the break even point if costs go down?
It will decrease
A decrease in costs allows for a lower sales volume to cover total costs.
What effect does an increase in prices have on the break even point?
It decreases
Higher prices mean that fewer units need to be sold to cover costs.
What effect does a decrease in prices have on the break even point?
It increases
Lower prices require more units to be sold to cover fixed and variable costs.
What is the break-even point in business?
A business breaks even when it produces just enough revenue from its output and sales to cover its costs.
