Unit 5: Business Finance Flashcards Preview

#2 Business Studies 2021 > Unit 5: Business Finance > Flashcards

Flashcards in Unit 5: Business Finance Deck (2)
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1
Q

What are the advantages of break-even analysis?

A
  • Charts are relatively easy to construct and interpret
  • Analysis provides useful points of consideration - break even points; safety margins; profit/loss
  • Comparisons can be made between different options by constructing new charts
  • Assists with important decision making e.g. location decisions, buying new equipment etc.
2
Q

What are the limitations of break-even analysis?

A
  • Assumes costs/revenue will be linear but this is not the case e.g. dropping selling price in order to sell all units; paying labour overtime rates in order to produce close to maximum capacity; extra unforeseen maintenance costs due to machine being overworked
  • Does not take into account semi-fixed costs
  • Assumes fixed costs don’t change. In reality, fixed costs are stepped