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Analysing Costs, Profits And Break Even Point

977 words - 4 pages

Costs, Profits and Break-even AnalysisAlas, this means coming to terms with numbers, something that seems to frighten a large proportion of Business Studies students. Before reaching the stage of actually drawing a break-even diagram we need to think what actually goes into one. First, we need to look at costs. They can be referred to in terms of output, time or product. When we speak of costs in terms of output and time we mean FIXED and VARIABLE costs. Remember fixed costs do not vary with output, whilst variable do. The TOTAL costs of a firm are its fixed and variable costs added together. We also need to remember that we borrow something from economists when we introduce time to the ...view middle of the document...

So, the costs taken away from the revenue gives us our gross profit or surplus. When thinking about how we construct a break-even diagram we also need to look at CONTRIBUTION. This means how much the sale of one product puts towards the fixed costs of the company. Once the firm has met its fixed costs, the revenue that then comes in contributes to profit. So contribution per unit of output is equal to: the selling price -the direct costs of producing each unit of product. We calculate this by either;a.the contribution per unit x the number soldb.total sales revenue - total direct costsSo, what will the examiners be looking for?1.They might ask you to provide reasons, implications, the reasons for a change in the outcome or what can be drawn from your calculations. Remember to think how, what, why, how and who when addressing a piece of analysis.2.They may ask you to draw conclusions from what you have calculated. This might involve you in commenting on how a changing set of circumstances might influence the numbers, or what other factors would you want to see before offering advice on the calculations, or assessing the usefulness of what has been calculated, or whether you think the numbers can be maintained given the information you have and how do your numbers compare with previous figures available.It's worth remembering that in many questions it's what you say, that is the quality of your comments that actually earn you the majority of marks.Let's now turn our attention to break-even analysis.In short we are trying to establish the minimum amount...

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