break even

• break even = point where total revenue = total costs so no profit or loss, helps business understand how many units of output they need to sell to cover their costs
• contribution is the measure of how much each item sold contributes towards fixed cost
• revenue is money coming into the business from goods/services
• profit is money leftover after all costs are dedcuted
• profit importance =

  managers able to assess whether product/service is profitable if not could be making a loss and endanger business

  essential that costs can be allocated accurately to a department or branch so manager can make more informed decisions about money
• uses of profit =

  distributing profit - paying out money made to owners

  retaining profit - keeping money for investment in business
• if you increase selling price on break even chart there is a lower break even quantity

  if you decrease selling price there is a higher break even quantity
• if you increase variable costs per unit on a break even chart there is a higher break even quantity

  if you decrease variable costs per unit there is a lower break even quantity
• if you increase fixed costs on a break even chart there is a higher break even quantity

  if you decrease fixed costs there is a lower break even quantity
• benefits of break even analysis

  quick and simplistic

  good for one off order decisions

  key element of business plan - financial investors expect it

  enables 'what if' analysis - helps see impacts
• negatives of break even analysis

  assumes all output is sold

  ignores actions of effects and competitors

  simplification of real world
• margin of safety is the amount of sales that can fall before the break-even point (BEP) is reached and the business makes no profit.