A Fixed Cost is paid by a
Business. It will always
stay the same.
Examples of Fixed
Costs are...rent,
advertising, salaries
and interest payments
on Bank Loans.
Variable Costs
A Variable Cost is paid by a
Business. It will change
depending on the output.
Examples of Variable
Costs are...wages,
electricity bills, overtime
pay, raw materials and
maintenance of
machinery.
Variable Costs = Selling Price Per Unit X Output
Break Even Analysis
The Break Even Point is when the Total
Revenue made by a Business is equal to the
Total Costs. The Company will not make any
Profit or any Loss.
Break Even Analysis can
show a Business how many
products they need to sell in
order to make Profits.
Break Even Point = Fixed Costs / (Selling Price - Variable Cost Per Unit)
We use the formula to calculate an accurate Break Even Point.
We can also use a graph to show Break Even Analysis. Firstly, a table must be plotted, including Fixed Costs,
Variable Costs, Total Costs, Total Revenue. We must use values given to us to complete the table. Then, we
must label both X and Y Axis on a Graph. The Y Axis should be labelled 'Costs' and the X Axis should be
labelled 'Output'. The Graph should also have a title. Then, lines representing Fixed Costs, Total Costs and
Total Revenue should be drawn. All three lines should be labelled. Where the Total Revenue Line and the
Total Costs line cross, this is considered the Break Even Point. It should be marked and dotted lines should be
drawn to both Axis.
Limitations of Break Even Analysis are... the method assumes all products made
are sold, if the method is completed incorrectly data will be incorrect, Break
Even Analysis is invalid if values change, companies selling numerous products
may find it useless and Break Even Analysis is of very little use in the real world.
Advantages of Break Even Analysis are...it
shows a Business what might happen in the
future, a Business can decide how many
products they need to sell and they can
understand how Break Even Points would
change if they changed the price of a product.
Total Costs
Total Costs are the total amount of money a Business has to pay.
Total Costs = Fixed Costs + Variable Costs
Total Revenue
Total Revenue is the
total amount of money
a Business makes from
selling products