Break Even

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  • Break Even
    • Contribution is the difference between sales revenue and the variable costs of production
      • contribution is not the same as calculating profit because fixed costs are not included
      • selling price - variable costs
      • total contribution= contribution per unit x no of units sold
        • if the total contribution is greater than fixed costs the business is making a profit
        • if the total contribution is less than fixed costs the business is making a loss
          • an increase in contribution per unit raises the potential for the amount of profit a business can make
        • contribution isn't the same as profit because fixed costs are subtracted
      • contribution per unit can be increased by raising the selling price because sales revenue increases
      • contribution per unit can be increased by reducing the variable costs
    • Break Even output = Fixed costs / contribution per unit (selling price - variable costs)
      • break even output is the level of output at which total sales revenue is equal to total costs of production
        • break even analysis is the study of the relationship between total costs and total revenue to indentify when a business breaks evens
      • the longer it takes to reach break even the higher the risk
      • Break even makes the assumptions that the selling price stays the same, fixed costs stay the same, variable costs stay the same, every unit produced is sold
      • strength of break even is to produce a best and worst case scenario to work out the amount of risk involved
        • strength is how long it will take to reach the level of output to make a profit
          • break even forecast can be used to show bank managers
            • break even analysis allows for change and shows how a business would react
          • the calculations are quick to produce and saving the business time
      • weakness  is information is unreliable
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