Breakeven

• What is the break even point?

  The point at which total revenue equals total costs.
• What does planning break even do?

  Helps the business work out how many items it needs to sell over a certain period of time to cover its costs
• What does monitoring break even do?

  Alerts the business to potential problems allowing them to fix them in good time
• What does controlling break even do?

  Helps identify where costs are increasing - business can take action to control it.
• How does break-even help give a target setting?

  Helps a business set targets for sales
• Benefits of contribution

  • Business is able to see whether the products it produces actually cover their own variable costs.
  • Used to set the price of the product in relation to direct production costs
• Limitations of contribution

  • Cont per unit may be low - business will need to sell a large number to cover costs
  • Cont per unit may be high on certain products
  • In each case, cont per unit is distorted and may not be valuable
• What is contribution?

  The amount of earnings remaining after all direct costs have been subtracted from revenue
• What is contribution per unit?

  The contribution per unit is the difference between the selling price per unit and the variable cost per unit.
• When might break-even have to be recalculated?

  • If selling price is increased/decreased - total revenue will rise more quickly
  • Fixed costs increase/decrease - total costs increase/decrease
  • Variable costs increase/decrease - affects total costs line
• What is margin of safety

  The amount sales can fall before they break-even
• Ways to improve break even and margin of safety

  • Increasing the selling price
  • Increasing volume of sales
  • Reduce variable costs