3.3 Break-even analysis Flashcards Preview

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Flashcards in 3.3 Break-even analysis Deck (16)
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1
Q

Contribution

A

the sum of money that remains after all direct and variable costs have been taken away from the sales revenue

2
Q

Formula for contribution per unit

A

contribution per unit = P - AVC

3
Q

Formula for total contribution

A

(P - AVC) x Q

4
Q

Formular for profit

A

total contribution - TFC

5
Q

How can profit be increased?

A

increase sales of the product
reduce variable costs
reduce fixed costs and overheads

6
Q

What are the uses of contribution analysis?

A
pricing strategy
product portfolio management
allocation of overheads to cost and profit centres
make-or-buy decisions
special order decisions
break-even analysis
7
Q

Break-even analysis

A

a management tool that can be used to determine the level of sales that must be made in order to make a profit

8
Q

What are financial conditions a business can be in?

A
loss = costs of production > revenues
break-even = costs of production = revenues
profit = costs of production < revenues
9
Q

What can BEA inform managers of?

A

whether it is financiallyworthwhile to produce or launch
a particular good or service
the expected level of profits that the business will earn if
all goes according to plan.

10
Q

How can the BEP be calculated?

A

TC = TR rule
breakeven = fixed costs / contribution per unit
interpretation for a break-even chart

11
Q

What does the margin of safety measure?

A

the difference between a firm’s sales volume and the quantity needed to break-even

12
Q

Formula of margin of safety

A

MOS (output) = level of demand - BEQ

13
Q

How to construct a break-even chart?

A
  1. draw and label the total fixed costs line
  2. draw and label the total costs line
  3. draw and label the total revenue line
  4. x-axis is labelled as the output
  5. y-axis is labelled as the ‘costs and revenues’
  6. title of the chart
14
Q

What factors may lead to a change in the profits or losses compared to the ones in break-even?

A

the difference between short-term and long-term profits
the level of demand is subject to change
profit depends on the level of risk involved
innovation and the introduction of new technologies
luck

15
Q

Which businesses are BE particularly beneficial to?

A

produce/sell a single standardised product
operate in a single market
make products to order (all output is sold)

16
Q

Why are limitations of break-even models?

A

assumes that all costs are linear
assumes the sales revenue is linear
assumes that the business will sell of their products
a static model