Business: Unit 3.3 Costs and Break even Analysis

What is output?

no. of units produced

How do you calculate revenue?

Price x quantity sold

What is fixed costs?

Costs that do not vary with the level of output

What is variable costs?

Costs vary with level of output

What are total costs?

Fixed costs + Variable costs

How do you calculate profits/loss?

Total revenue - Total costs

How do you calculate contribution per unit?

Price - Variable costs per unit

How do you calculate total contribution?

CPU x no. of units sold

What is break even?

the point at which the total revenue is equal to the total costs and all costs have been covered. 

What is break even’s purpose?

useful to know how many units need to be sold to cover total costs.

How do you calculate break even output?

Fixed costs / Contribution per unit

What is margin of safety?

the difference between actual level of output and the break even level. 

What are some strengths of break even?

Estimates future level of output needed to be produced -> to meet financial objectives.

Assess impact of planned price changes upon profit + the level of output needed to break-even

Assess how changes in fixed and variable costs may affect profits

Support applications for loans from banks + other financial institutions

What are some weaknesses of break even?

Assumes costs increase at same amount + neglects that firms may reduce costs from bulk buying

Assumes that firms sell all units at the same price over time

Assumes all output is sold

If data for costs and sales is inaccurate -> the forecasted break-even levels also.