AS - Break even analysis Flashcards
What is break-even analysis ?
When total costs = total revenue
According to break even analysis, when is a business making a loss?
When costs are more than revenue i.e sales are below the break even output
According to break even analysis, when is a business making a profit ?
When revenue exceeds costs i.e sales above break even output
What is the formula for contribution per unit?
Selling price per unit - variable costs per unit
What are the two formulas for total contribution?
Total revenue - Total variable costs
Contribution per unit x no. of units
What is contribution ?
What a business needs to achieve from selling products in order to cover fixed costs then make a profit
How do you calculate break even output ?
Contribution pu
How do you calculate margin of safety ?
Actual output - break even output
What does a positive margin of safety represent ?
Profitability
What does a negative margin of safety mean?
The business is making a loss
What are the ways of improving margin of safety ?
Increasing contribution per unit:
- Raising sp. -reducing vc
Lower break-even output:
- Reduce FC. - Turn FC into VC
Increase output
What do break even charts show ?
Display costs + revenue plotted against output
How costs + rev vary with output
Where is output displayed on a break even chart ?
Horizontally
Where are costs + revenue displayed on a break even chart ?
Vertically
What do you plot on a break even chart ?
Total Revenue
Total Costs
Break even
Fixed Costs
What are the advantages of break even analysis ?
Easy
Quick -> allows managers to take action
Helps persuade banks to give loans
Influences whether or not to launch a new product
Forecasts how sales variations will affect cost, rev + profit
Forecasts how price variations will affect how much they need to show
What are the disadvantages of break even analysis ?
Assumes fixed costs will be steadily rise. but this isn’t true
Simple for 1 product but complicated for looking at business as a whole
Results will be wrong if any data is
Assumes business will have no waste
Only tells you how many units you need to sell not what you are actually going to sell
