Chapter 5: Profit, Profitability, and Break-Even Analysis
Terms
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- Obtaining the highest possible return with the minimum use of resources.
- Efficiency
- Accomplishing a specific task or reaching a goal.
- Effectiveness
- An absolute number earned on an investment.
- Profit
- What a business has left from its revenues after paying all expenses, including cost of goods, administrative expenses, overhead, interest, and taxes.
- Accounting profit
- The amount earned above and beyond what the entrepreneur would have earned if that person had chosen to invest time and money in some other enterprise.
- Entrepreneurial profit
- The return on investment and is related more to the concept of efficiency than that of effectiveness.
- Profitability
- The product of two factors:(1) the company's ability to generate income on the amount of revenue it reveices and (2) its ability to maximize sales revenue from proper asset employment.
- Earning power
- Net profit (income) / Total assets = ?
- Earning power
- Financing a company with other people's money.
- Financial leverage
- Occurs when the liabilities of the firm exceed the assets and the business lacks sufficient cash flow to make payments to creditors.
- Bankruptcy
- Occurs when a business seeks court protection while it develops a plan to pay off its creditors.
- Chapter 11 bankruptcy
- Requires liquidation of all assets of the business and payment to the creditors.
- Chapter 7 bankruptcy
- A process of determining how many units of production must be sold before a firm begins to earn a profit.
- Break-even analysis
- The number of units required to break-even.
- Break-even quantity
- Fixed Costs / (Price - Variable cost) = ?
- Break-even quantity (BEQ)
- What the company charges for the product or service.
- Price
- All costs associated with producing or procuring a product or service that is sold by a firm.
- Variable costs
- Costs of running a business that are not tied to the amount of production or sales.
- Fixed costs
- The amount of profit that will be made by a company on each unit that is sold above and beyond the break-even quantity.
- Contribution margin
- P - VC = ?
- Contribution margin (in BEQ equation)
- Revenue required to breakeven.
- Break-even dollars (BE$)
- Fixed Costs / (1 - (Variable costs / Price)) = ?
- Break-even dollars (BE$)
- Graphical representation of a firm's break-even point.
- Break-even chart