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Chapter 5: Profit, Profitability, and Break-Even Analysis (copy)


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Obtaining the highest possible return with the minimum use of resources.
Accomplishing a specific task or reaching a goal.
An absolute number earned on an investment.
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.
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.
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.
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

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