Break-Even Analysis

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  • Created by: hamishc
  • Created on: 20-04-16 22:29
What is break-even output?
The level of sales needed to cover costs.
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Why is break-even analysis important for new businesses?
Allows them to gain finance from banks and venture capitalists, and see how much they need to sell to break even.
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Why is break-even analysis important for established businesses?
If they are preparing to launch a new product then this will allow them to find how much profit they are likely to make, also used to predict impact on cash flow.
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Equation for contribution per unit.
CPU = selling price per unit - variable costs per unit
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Equations for total contribution.
CPU = revenue - variable costs OR CPU x units sold
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Equation for break-even output.
Break-even output = fixed costs / CPU
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Equation for margin of safety.
Margin of safety = actual output - break-even output
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How can a business increase margin of safety?
Lowering costs or increasing revenue. Doing so reduces risk.
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Give 5 advantages of break-even analysis?
It is easy to do, it's quick, allows a business to calculate how variations in costs, revenue, profits, price and costs will affect need for sales, can be used to persuade bank for loan, making decisions on whether new products are launched or not.
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Give 5 disadvantages of break-even analysis?
Assumes variable costs always rise steadily, simple for a single product but businesses sell more than one product, if the data is wrong results will be wrong, assumes the business sells all products without wastage, doesn't predict sales.
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Other cards in this set

Card 2

Front

Why is break-even analysis important for new businesses?

Back

Allows them to gain finance from banks and venture capitalists, and see how much they need to sell to break even.

Card 3

Front

Why is break-even analysis important for established businesses?

Back

Preview of the front of card 3

Card 4

Front

Equation for contribution per unit.

Back

Preview of the front of card 4

Card 5

Front

Equations for total contribution.

Back

Preview of the front of card 5
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