2.2.3- Break Even

Question 1

Definition of break even

Answer 1

the point at which revenue is equal to cost, meaning the company is not making either a profit or loss

Question 2

Contribution formula

Answer 2

contribution = selling price- variable costs (per item)

Question 3

Break Even formula

Answer 3

fixed costs/ contribution

Question 4

Margin of safety

Answer 4

difference between the break even point and the current level of output

Question 5

Limitations of break even analysis

Answer 5

• assumes every item produced is sold
• in a service business, selling price may differ and not be consistent
• in some businesses, fixed costs are shared among the whole product portfolio