break even Flashcards
What is revenue?
Revenue is the money a business earns from selling goods or services.
Formula: Total Revenue = Selling Price × Quantity Sold
What is profit and how is it calculated?
Profit is the amount a business earns after deducting total costs from total revenue.
Formula: Profit = Total Revenue – Total Costs
What are fixed costs?
Fixed costs remain the same regardless of output level.
Examples: Rent, insurance, software subscriptions, loan interest
What are variable costs?
Costs that change directly with output.
Examples: Raw materials, direct labour, fuel
What are semi-variable costs?
Costs with both fixed and variable elements.
Example: Staff with base pay (fixed) and overtime (variable)
What are direct costs?
Costs directly linked to the production of a specific product.
Examples: Components, direct labour, royalties
What are indirect/overhead costs?
Costs not directly tied to specific products.
Examples: Admin wages, advertising, office rent
What is total cost and how is it calculated?
Total cost is the sum of fixed and variable costs.
Formula: Total Cost = Fixed Costs + Variable Costs
How do you calculate contribution per unit?
Contribution = Selling Price per unit – Variable Cost per unit
What is total contribution and how is it used?
Total contribution = Contribution per unit × Units Sold. Profit = Total Contribution – Fixed Costs
What is break-even output and how is it calculated?
Break-even output is the number of units that must be sold to cover all costs.
Formula: Break-even = Fixed Costs ÷ Contribution per Unit
What is the margin of safety and how is it calculated?
The margin of safety is how much output can fall before losses occur.
Formula: Margin of Safety = Actual Output – Break-even Output
How can a business improve its margin of safety?
Increase output, reduce fixed costs, raise prices, or lower variable costs.
What is a break-even chart used for?
To show costs, revenue, and output levels visually. It helps identify the break-even point and margin of safety.
What is ‘what-if’ analysis in break-even?
It examines how changes in costs or prices affect the break-even point.
What are the benefits of break-even analysis?
- Assesses financial viability
Helps gain funding
Used for planning and decision-making
What are the drawbacks of break-even analysis?
- Assumes all output is sold
Ignores bulk discounts or price changes
Accuracy depends on data quality
