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3.3 Break even Quantity - Coggle Diagram
3.3 Break even Quantity
Contribution
The return a business makes from the products sold that will contribute to cover its fixed costs after deducting the variable costs.
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The graphical Method
Fixed costs need to be paid no matter what level of output and, because they are constant at these levels, they are represented by a horizontal continuous line
The total variable costs are found by multiplying the number of units produced by the variable cost per unit.
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Break even
Important for start-up businesses or businesses engaging in new ventures to establish the minimum number of products they need to sell to cover all their costs
Margin of Safety
A measure of the difference between the break-even level of output and the actual (current) level of output is known as the margin of safety
Businesses may need to know how much output they need to produce beyond the break-even point as well as how much output or sales could fall before a loss is noted
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Profit or loss
The break-even chart showed that any sales that exceed the break-even quantity generate profit for a business, while sales that are less than the break-even quantity lead to losses.
Break even revenue
It is the revenue required to cover both the fixed and variable costs in order for a firm to break even.
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Benefits BEA
Break-even charts provide an easy and visual means of analysing a firm’s financial position at various levels of output.
Changes in prices and costs and their impact on profit or loss, break-even point, and margin of safety can be compared by using the charts or by calculation.
Limitations
Apart from showing fixed and variable costs, semi-variable costs are not represented on the break-even chart. If these are included, it makes the process more complex
A break-even chart may not be very useful in changing or dynamic business environments. For example, the break- even chart may not cope with sudden changes in prices, costs, or technology.