break-even charts and break-even analysis
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3.3_break_even_charts_and_break_even_analysis_v.2.pptx | |
File Size: | 1042 kb |
File Type: | pptx |
3.3_break_even_charts_and_break_even_analysis_starter_activity.docx | |
File Size: | 38 kb |
File Type: | docx |
The break-even point is very important for all businesses. It is the level of output where revenues just equal costs. Knowing the break-even point helps a business to understand how many products it needs to sell to just cover the costs of production. If revenues equal costs exactly, then the business is not making a profit; Nor is it making a loss.
If a business sells more than the break-even point it will make a profit, and less than the break-even point, a loss. To complete a break-even chart or a break-even graph, certain information is required:
Total revenue = quantity sold x average selling price
Fixed costs
Variable costs = variable costs (average cost/average revenue) x quantity produced
Total costs = fixed costs + variable costs
If a business sells more than the break-even point it will make a profit, and less than the break-even point, a loss. To complete a break-even chart or a break-even graph, certain information is required:
Total revenue = quantity sold x average selling price
Fixed costs
Variable costs = variable costs (average cost/average revenue) x quantity produced
Total costs = fixed costs + variable costs
example_break-even_chart.pptx | |
File Size: | 90 kb |
File Type: | pptx |
Key term - BREAK-EVEN CHART - a graph which shows total revenue and total costs, allowing the break-even point to be drawn
Key term - MARGIN OF SAFETY - the amount of output between the actual level of output where profit is being made and the break-even level of output; if the margin of safety is zero, then production is at or below the break-even level
Key term - MARGIN OF SAFETY - the amount of output between the actual level of output where profit is being made and the break-even level of output; if the margin of safety is zero, then production is at or below the break-even level
Drawing a break-even chart is not the only way to find the break-even level of output. The break-even point can also be calculated using contribution analysis. This means using the values for sales revenue, variable cost and fixed cost.
Price = £2
Variable cost per product = £0.50
Contribution therefore = £1.50 (this is first used to pay off fixed costs, then towards a profit)
Key term: CONTRIBUTION: price per item sold - variable cost per item
So if fixed costs = £120,000, how many contributions are needed to pay off this and therefore, break-even?
£120,000/£1.50 = 80,000 units sold
Break-even level of output = fixed costs/contribution
or
total fixed cost/ (sales revenue per item - variable costs per item)
Price = £2
Variable cost per product = £0.50
Contribution therefore = £1.50 (this is first used to pay off fixed costs, then towards a profit)
Key term: CONTRIBUTION: price per item sold - variable cost per item
So if fixed costs = £120,000, how many contributions are needed to pay off this and therefore, break-even?
£120,000/£1.50 = 80,000 units sold
Break-even level of output = fixed costs/contribution
or
total fixed cost/ (sales revenue per item - variable costs per item)
3.3_break_even_charts_and_break_even_analysis_activity.docx | |
File Size: | 20 kb |
File Type: | docx |