break even

Cards (12)

  • 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.