Break even

What is the difference between revenue and profits?

↳ Revenue- the amount of money the business earns

↳ Profit- money left over after costs are taken away

↳ Profit= revenue - costs

What is costs?

↳ Amount of money that the business has to spend

What is the difference between fixed and variable costs?

↳ Fixed- costs that don’t change with output

↳ Variable- costs that will increase as output increases

↳ Total costs= fixed costs + variable costs

What is break-even output

↳ Level of output where the firm just covers it’s costs

↳ Where total costs and total revenue are equal

What is the margin of safety?

↳ Gap between the current level of output and the brea-even point

What are advantages of a break-even chart?

↳ Easy to work out

↳ Quick- know if they want to imcrease their margin of safety

↳ Predict how changes in sales can affect costs,revenue and profits

↳ Predict how chnages in price and costs will affect sales

↳ Help persuade a bank to give them a loan

↳ Stop a business from realising products that might be hard to sell in large quanitities

What are disadvantages of a break-even chart?

↳ Assumes that the firm can sell any quantity of the product at the current price

↳ Assumes all the products are sold (no waste)

↳ Data could be wrong therefore results could be wrong

↳ It can be complicated if it involves more than one product

↳ Only shows how much a business needs to sell not how much it will actually sell