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 increasesellingprice on break even chart there is a lower break even quantity
if you decreasesellingprice there is a higher break evenquantity
if you increasevariablecostsperunit on a break even chart there is a higher break even quantity
if you decreasevariablecostsperunit there is a lower break even quantity
if you increasefixedcosts on a break even chart there is a higher break evenquantity
if you decreasefixedcosts 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.