Break Even Analysis

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What is the formula for break even?
Fixed costs/contribution per unit
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What are the limitations of break even?
Assums all output is sold, Presumes there is only one product, Costs and revenues are expressed in straight lines, Fixed costs may be stepped, Not possible to extrapolate, External factors not considered, Concentrates on break even point too much.
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What is margin of safety?
The amount by which sales exceed the break even point
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What is the formula for margin of safety?
(Current output-Break even output)/Current output x100
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What is the formula for calculating output needed to be sold to achieve a target profit?
(Fixed costs+Target profit)/Contribution per unit
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What is the contribution sales ratio?
Expresses the amount of contribution in relation to the selling price.
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What is the formula for contribution to sales ratio?
Contribution/Selling price
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When should break even be used?
Before starting a business, When making changes within a business, To measure profits and losses, To answer what if? questions, To evaluate alternative view points.
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Card 2

Front

What are the limitations of break even?

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Assums all output is sold, Presumes there is only one product, Costs and revenues are expressed in straight lines, Fixed costs may be stepped, Not possible to extrapolate, External factors not considered, Concentrates on break even point too much.

Card 3

Front

What is margin of safety?

Back

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Card 4

Front

What is the formula for margin of safety?

Back

Preview of the front of card 4

Card 5

Front

What is the formula for calculating output needed to be sold to achieve a target profit?

Back

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