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Flashcards in Break Even Assesment Deck (13)
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1

Revenue

The money a business receives from seeking products and services

2

Variable costs

Costs that change as output changes (e.g piece rate of workers or VAT paid on the number of goods sold)

3

Average costs

The cost for each unit of a product that a business sells

Total cost/amount sold

4

Fixed costs

Costs that remains the same regardless of output

5

Total costs

Total Fixed costs + total variable costs

6

Why is knowing the average cost useful

It allows you to conduct selling prices as you then know how much each unit costs you individually

7

4 ways to reduce average cost

Reduce amount paid for materials (economies of scale/negotiations)

Reduce wage costs

Increase efficiency of production (eg change from batch to flow)

Use JIT

8

What is the break even point on the graph

Where sales revenue and total costs cross over

9

Break even formula

Break-even output = total fixed costs / (selling price-variable cost per unit)

10

Margin of safety

The difference between the actual level of output and the break-even output

11

Margin of safety formula

Actual sales - break-even sales

12

Benefits of break even

Helps to set a sales target

Helps to get loans as you can convince banks that you will be able to repay them

Used to make decisions such as whether to increase prices or reduce costs

13

Disadvantages of break even

Forecast figures may turn out differently

Figures only relate to one product, a business usually sells more than one products

It assumes all output is sold