Business- Booklet E Breakeven
What is Breakeven?
When income is exactly equal to expenditure, meaning the business makes no profit but doesn't loose any money.
Advantages of Breakeven
Clear target of how many items need to be sold to breakeven
Easy to set budgets
Helps identify where costs are too high
Disadvantages of Breakeven
-Targets may be unrealistic
-If costs vary slightly, it will impact breakeven
Define Margin Of Safety
Number or value of the units sold above the breakeven point.
Why is planning important?
1. Helps the business to work out how many items needs to be sold over a certain period of time to cover costs
2. Used to plan pricing stratergies
Why is Monitering important?
1. Moniter progress
2. Allows the business to take action & rectify the problems
Why is Control important?
1. Control costs, set budgets
2. Identify where costs are increasing
Why is Target Setting important?
1. Set targets for sales, proft
2. Motivate workers by having targets
Equation for Total Revenue
Quantity Sold x Selling Price
Equation for Total Costs
Fixed costs + Variable costs
What is Contribution Per Uni?
Is the amount by which an individual unit sold exceeds its variable costs
Equation for Contribution Per Unit
Selling Price - Variable Cost per unit
Equation for Breakeven point
Fixed Costs divided by Contribution Per Unit
Equation for Margin of Safety (units)
Actual sales in units - Breakeven level of output
Equation for Margin of Safety (value)
Margin Safety in units x Selling price
2 equations for calculating profit
1. Contribution per unit divided by margin of safety
2. Total Revenue - Fixed Costs
Define Variable costs
Costs that vary with the level of output
e.g material, more products=higher cost of material
Define Semi-variable costs
Costs are fixed at a set level then become variable
e.g. phone contract is £50, added amount for more data
Define fixed costs
Do not vary with businesses level of output
e.g. rent
Define Total costs
All the costs involved in producing/selling the product
Fixed costs + Variable costs