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improvements for business studies theme 2 (break-even charts: (the break…
improvements for business studies theme 2
break-even charts:
the break-even line is where the total revenue line crosses the total costs line
what is included on the graph:
fixed costs (straight line as fixed costs do not vary with output)
variable costs (will increase as output does)
total costs (the addition of fixed costs and variable costs)
total revenue (price x number of items sold)
inflation:
figures are produced and averaged every month by the government and is based upon the prices of 700 items bought regularly ex. food.
statement of financial position (flaws)
it does not show the businesses performance for over a period of time ex. one year
it shows a snapshot of what the businesses owns (assets) and owes (liabilities) on one particular day
theory work with liquidity
there are two types of liquidity ratios (current ratio + ATR)
they identify if a business has enough cash, receivables and stock to pay for short-term debts
if a business has poor liquidity it will have cash-flow problems
order of liquidity (assets)
cash & bank balences
receivables
stock (inventory)
improving the current ratio:
reduce credit terms
long-term loans as it will not affect the current liabilities
avoid paying dividends
working capital cycle:
goods are produced
sold to customers
money is used for new materials
sales volume: is the number of products or services a business sells
a business can manage working capital by:
minimising stock
keeping customer credit low
difficulties of sales forecasting:
although the risk of producing inaccurate forecasts can be reduced. they are not guaranteed.
businesses operating in the dynamic market will find it difficult to forecast accurately beyond a very short period of time
margin of safety: shows how many units of sales can afford to be lost, before the firm starts to make a loss
contribution per unit: looks at how the sale of one product contributes to paying off fixed costs
total contribution: looks at how the sales of all the products can contribute to paying fixed costs
limitations of break-even analysis:
it is only useful for a business that makes a single product
can only be as accurate as the data it is based on
if costs / selling price is incorrect, forecasts are wrong
costs do not rise as fast as the technique suggests, variable costs can rise slower because of the benefit of buying in bulk
altering the break-even output:
a business can reduce their break-even output by increasing prices
or cutting variable costs by purchasing in bulk