Break even - when a business makes neither a profit nor a loss.
The break even point is where total costs meets total revenue in a graph. costs=revenue.
There are different natures of cost: Fixed, variable and semi-variable.
Fixed costs- costs that are not effected by output. Things like rent need to be paid regardless of how much the business is selling.
Variable costs- costs that are effected by output. Things like cost of materials will increase as the business makes more.
Semi variable- costs that are fixed but can increase if you go over a limit. Telephone bills are a fixed rate but if they are over the limit then addition cost is added toward the fixed cost already there.
A break even chart includes these things and more, such as the margin of safety.
The margin of safety is the difference between the total sales volume and the break even volume. It is the amount of money/units you have made over the break even and is considered to be profit made.
Target profit can be calculated through untis needed.
this calculation is : Fixed cost+target profit
contributuin per unit.
contrubution per unit is calculated by: fixed cost per unit - variable cost per unit.
This can be used to confirm the value spotted on the chart.
the C/S ratio
calculating the c/s ratio - contribution/ sales.
3/ 8 = 0.375 or 37.5%
It can be used to calculated the break even point in £. The decimal figure must be used in order to calculate it.
Break even point= Total fixed cost/ C/S ratio decimal.
Usefullness of break even analysis
If it is before the business has started:
- Allows the business to see the level of sales it will need to achieve to start making a profit.
- Will there be enough demand for this level of sales?
- Does the business have enough resources for this level of output?
what if analysis:
- Takes out the guess work out of "what if" questions
- Profit changes due to revenue and costs can be assessed.
- Significant changes cannot be assessed
- It allows different options to be assessed and compared which allows the buisness to make objective decisions.
- The assumption is that only one product is made.
- The business is assumed to sell everything it makes.
- The selling price stays the same as output varies
- Fixed costs dont change
- Variable costs per unit stay the same
- External factors are not considered.