Business - break even and profit

break even definition

Break-even point of a business is the the number of sales that a business needs to make in order to make neither profit nor a loss, how many units does a business need to make an operating profit of £0.

formula for break-even

Fixed cost / contribution per unit

break even

= the point at which total revenue and total cost cross on a break even chart.

alternative way of writing the formula for breakeven

fixed cost / selling price - variable costs per unit

what is margin of safety

how far sales sales could fall before the business starts to make a loss

formula for margin of safety

Actual level of sales - break even level of sales

1 postive for breakeven

calculations are quick and easy

2 positive for BE

focuses on what output is required

3 positive for BE

monitors performance sets targets and motivates employees to achieve sales goals.

3 positive for BE

Establishes if a product is worth it, if a product will produce any profit.

1 negative for BE

only works for one product at one price

2 negative for BE

fixed and variable cost can vary

3 negative for BE

not a decision making tool

profit

the reward or return for taking risk and making investments

statement for comprehensive income

a document that shows revenue, a breakdown of different types of cost and different types of profit for a year.

profit formula

total sales - total cost

“a statement of comprehensive income”

Revenue = selling price x volume sold

cost of sales - variable cost

gross profit

expenses - overheads (fixed cost)

operating profit

interest - finance - tax

profit for the year (net profit)

what is it meant by cost of sales

the cost directly associated with making a product eg raw materials

what is it meant by other operating expenses

all other cost the business has t pay that aren’t directly involved in making the product, including fixed cost that have too be paid even if the business produced nothing

what is it meant by interest

the interest businesses have to pay on any loans they owe ± the interest they receive on any investments they may have.

gross profit formula

revenue - cost of sales

definition of gross profit

how much profit the business is making when fixed cost aren’t taken into account.

operating profit formula

gross profit - other operating expenses

profit for the year

operating profit - financial cost/interest

Gross profit margin

Gross profit / revenue x 100

operating profit margin

operating profit / revenue x100

profit for the year margin

profit for the year / revenue x 100

profitability definition

profit as a %of revenue

improving profitability

cutting costs and charging higher prices

CASH

can flow in and out of a business (income and expenditure)

PROFIT pt2

Is the reward or return (expenditure - income )

profitable businesses can still fail due to

bad leadership

lack of demand

competitors

financial and economical crisis