breakeven point

• What is the break even point?

  Where total revenue equals total costs
• Why is knowing the break even point essential for companies?

  It indicates minimum sales to cover costs
• What might failing to reach the break even point indicate?

  Financial troubles or potential business failure
• What are fixed costs?

  • Costs that remain the same
  • Examples: rent, insurance, utilities, advertising
• What are variable costs?

  • Costs that fluctuate with sales volume
  • Examples: direct labor, materials like cement or wood
• How are total costs calculated?

  By combining fixed and variable costs
• How is total revenue calculated?

  Units sold multiplied by price per unit
• If fixed costs are £10,000, sales price per unit is £5, and variable cost per unit is £2.50, what is the break even point in units?

  4,000 units
• What is the formula for calculating the break even point?

  Break Even Point = Fixed Costs / (Sales Price - Variable Cost)
• How do you calculate the contribution margin?

  Sales price per unit minus variable cost per unit
• What assumption does the break even analysis make?

  All units are sold and forecasts are reliable
• What is the margin of safety?

  Difference between actual sales and break even point
• If actual sales are £250,000 and the break even point is £100,000, what is the margin of safety?

  £150,000
• How is the margin of safety expressed as a percentage calculated?

  (Actual sales - Break even point) / Actual sales * 100
• If actual sales are £250,000 and the break even point is £100,000, what is the margin of safety percentage?

  60%
• What risks does a business face if it doesn't break even consistently?

  It risks accruing debts and failing
• How can understanding the break even point help businesses?

  • Set clear sales and revenue goals
  • Make strategic decisions (product launches, pricing adjustments, cost reductions)
• What does the break even point indicate for a business?

  When total revenue equals total costs
• What are the components of total costs?

  Fixed costs plus variable costs
• What is the formula for break even point in units?

  Fixed costs / (Sales price - Variable cost)
• What is the formula for break even point in pounds?

  Fixed costs / Contribution margin
• What does a business need to do to be profitable?

  Consistently achieve the break even point