Business - Unit 5: Finance - 5.4

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  • 5.4 - Break-even
    • Break-even
      • When total costs equals the revenue and profit is £0
      • Break-even point = FC / contribution per unit
        • Contribution per unit = price per unit - variable cost per unit
      • Calculated as a forecast and represented in a graph
    • Margin of safety
      • The amount by which actual sales are greater than break-even sales
      • Margin of safety = actual sales - break-even sales
    • Limitations of break-even analysis
      • Only a forecast and prediction so it does not account for external factors e.g. competitor activity
      • Assumes that price remains the same throughout output
      • Cost of materials or suppliers may change
      • A price increase does not always lead to an increase in revenue - they may lose customers due to higher prices so sales may fall
      • Needs updating often
    • Uses of break-even analysis
      • Needed to plan their price etc. based on sales level
      • Useful when applying for loans - necessary part of business plans
      • Make judgement about price and costs e.g. if costs are too high
      • Used to find expected profit to plan about dividends & expected profit
      • Shows margin of safety and the impact of external changes on financial health
    • Link to break-even graph website


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