business finance

what is breaking even

• occurs when income is exactly equal to expenditure, thus showing neither profit nor loss

• to make profit, income must be higher than expenditure

what 2 ways can cost be categorized in

• variable

• fixed

what are some variable costs

• packaging

• raw material

• direct labor

• marketing and advertising

• shipping costs

what are some fixed costs

• rent

• machinery

• water bill

• equipment leases

• depreciation

• interest payment

what is a semi variable cost

expenses that include both fixed element and a variable component. this means a portion of the cost remains constant regardless of the business activity while another fluctuates directly

what is sales

• total revenue

• selling price per unit

• sales in value

• sales in volume

what is total revenue

it’s the total amount of many coming into the business from the sale of its products or services. it is simply the quantity sold multiplied by the selling price

what is sales in volume

amount of sales expressed as a quantity ‘100 units were sold’

what is sales in value

total amount of sales made expressed as a monetary value ‘10 000 pounds of goods’

what is contribution per unit

the amount by which an individual unit sold exceeds its variable costs. used to help calculate break-even point of a business.

whats the formula to work out contribution per unit

selling price - variable cost per unit

how to work out the break-even point

fixed costs/ contribution per unit

what is margin of safety

it’s when a business is producing and selling more than the break-even level of output

how to work out margin of safety

actual sales in units - break-even level of output

what is the break even analysis

• it’s the point in which sales revenue is the same as total costs

• useful for making financial decisions

• business is not making a profit or loss

• if revenue is higher than costs, the business is making profit

• if revenue is lower than costs, business is making a loss

what is contribution per unit

how much each unit contributes towards costs initially and profit long term 

what are the strengths of breakeven analysis

• quick, simple and aids decision making

• predicts the level of risk and margin of safety

• shows the potential profitability

• shows how many units need to be sold before a profit is made 

what are the limitations of a break-even analysis

• costs can change

• assumes all products are made and sold

• not very good for services because prices vary enormously