Flashcards in Business Finance Deck (35):

1

## What is break even?

### The level of output or production at which a business's sales generate just enough revenue to cover all its costs of production. At the break even point, a business makes neither a loss nor a profit.

2

## Why is break even analysis used in a business? demand they can survive.

###
•Estimate levels of output they need to produce & sell

•Assess impact of price changes on profit & output needed to break even •Assess how changes in cost impact on profits and break even output •Determine margin of safety

3

## What are fixed costs?

### Costs that have to be paid regardless of the level of production and sales. e.g. fixed cost of factory to manufacture trainers £20,000 a month.

4

## What are variable costs?

### Costs dependent on production level. If production increases then costs like wages and raw materials increase.

5

## What are the total costs?

### The sum of the fixed and variable costs.

6

## What is revenue?

### The income that a business receives from selling goods or services. If each pair of trainers sells at £32.50 each and 1,000 pairs are sold, total revenue is £32,500.

7

## What is the break even formula?

### break even point= total fixed costs/contribution

8

## On a break even chart, what do you plot on the horizontal (x) axis?

### Output (units) e.g. number of CDs, number of lessons etc.

9

## On a break even chart, what do you plot on the vertical (y) axis?

### Costs and Revenue (£)

10

## What type of line do you have for fixed costs and why?

### Horizontal fixed costs line. It is horizontal because fixed costs don't change with output.

11

## What is the total costs line?

### The fixed cost added to the variable cost gives the total cost.

12

## How do you calculate variable costs?

### Variable cost per unit x number of units = Total Variable Costs. e.g. The variable cost per unit is £2 and there are 2,000 units = £4,000.

13

## How do you calculate revenue?

### Sales Price x Number of Units

14

## Where is the break even point?

### Where the total revenue line crosses the total costs line is the break even point (ie costs and revenue are the same). Everything below this point is produced at a loss, and everything above it is produced at a profit.

15

## What happens if total output and sales are greater than break even?

### If total output and sales are greater than break even, then revenue is greater than cost so the business makes a profit.

16

## What happens if total output and sales are equal to break even?

### If total output and sales are equal to break even, then revenue equals total cost so the business breaks even.

17

## What happens if total output and sales are less than break even?

### If total output and sales are less than break even, then revenue is less than total cost and so the business makes a loss.

18

## What is contribution?

### Contribution is the difference between sales price and variable costs

19

##
How do you calculate contribution? (formula)

### Contribution = sales price - variable costs

20

## What is contribution used for?

### Used to pay the fixed costs incurred by a firm.

21

## How is contribution calculated for the sale of a single product? (contribution per unit)

### contribution per unit = selling price of one unit of output - variable cost of producing that unit (it's this formula that's useful when calculating the break even point)

22

## Why is it useful to find the contribution for the sale of a single product?

### Avoids the need to divide up fixed costs between the firm's various products. This assists entrepreneurs in assessing the financial performance of each of their products.

23

## Alternative method to calculate break even...

### break even = fixed costs/contribution per unit

24

## How can break even help an entrepreneur to predict profit or loss?

### If an entrepreneur believes that he can provide a achieve a certain level of sales they can use a break even chart to read off the expected profit or loss at various levels of output. Provides guidance as to whether it will be profitable or not.

25

## What is the margin of safety?

### The amount by which a firm's current level of output exceeds the level of output necessary to break even.

26

## What is the formula for the margin of safety?

### Margin of safety = actual sales - break even point

27

## SARAH'S NEW RESTAURANT IS SUCCESSFUL AND ATTRACTS 600 CUSTOMERS EACH MONTH. HER BREAK EVEN POINT IS 400 CUSTOMERS EACH MONTH? WHAT IS THE MARGIN OF SAFETY AND WHAT DOES THIS MEAN?

### Her restaurant could lose 200 customers monthly before it began to make a loss.

28

## What is the impact on break even output if there is a rise in variable costs?

### A greater output is necessary to break even. A greater revenue is also necessary (more customers/sales) to break even.

29

## What is the impact on break even output if there is a fall in variable costs?

### Smaller output required to break even. Smaller number of customers needed to cover costs (less sales).

30

## What is the impact on break even output if there is a rise in fixed costs?

### Greater output to break even. Business incurrs higher costs, so more sales needed to cover costs and break even.

31

## What is the impact on break even output if there is a fall in fixed costs?

### Smaller output is necessary to break even. Businesses costs are lower which means fewer sales are required to break even.

32

## What is the impact on break even output if there is a rise in selling price?

### Lower output required to break even. Each sale provides the business with greater revenue while costs are unaltered. So fewer sales necessary to break even.

33

## What is the impact on break even output if there is fall in selling price?

### Higher output required to break even. Each sale earns the business less revenue so more sales will be required to earn sufficient revenue to break even.

34

## Why is it important for a business that operates in an environment which alters frequently to conduct a break even analysis? (what if analysis?) planning and decision making.

### It is too simplistic to assume that costs will remain constant or prices in their markets will not alter over a period of time. Using break even analysis for a number of 'what if?' scenarios can increase the value of the technique in the financial

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