2.2.3 Break even

Question 1

What is the break even point?

Answer 1

Where total revenue is equal to total cost

Question 2

What does break even analysis indicate about a business’s profit?

Answer 2

The business is making neither a profit nor a loss

Question 3

Why is break even analysis less useful for businesses producing multiple products?

Answer 3

Different Costs and Prices: Each product has different costs and prices, making it harder to calculate a single break-even point.

Allocation of Fixed Costs: Fixed costs must be shared among various products, which complicates the analysis.

Complex Sales Mix: In multi-product businesses, the sales mix varies, so the contribution per product may change, affecting the overall break-even calculation.

Diverse Profitability: Not all products contribute equally to profits, and break-even analysis doesn’t capture the impact of different products on overall profitability.

Question 4

How is the break even point calculated?

Answer 4

Break even point =fixed cost%contribution

Question 5

What is the margin of safety?

Answer 5

Difference between actual level of output and its break even level of output

Question 6

How do you calculate the margin of safety?

Answer 6

Actual output - break even level of output

Question 7

What is a break even chart?

Answer 7

a visual representation on a graph that shows a business’s revenue, fixed costs, variable costs, and total costs at different levels of output

Question 8

What is a limitation of break even point analysis?

Answer 8

The accuracy relies upon the quality of data used in calculations

Question 9

What assumption does break even analysis make about output?

Answer 9

All output is sold

Question 10

What is a limitation regarding the break even chart when conditions change?

Answer 10

Cannot be easily amended