2.2.3 break even

Question 1

what is break even?

Answer 1

when sales revenue is the same amount as total costs

Question 2

what is the break-even output?

Answer 2

amount of output a firm needs so the total costs are the same as total revenue

Question 3

what is the calculation for break even?

Answer 3

fixed costs
__________________
contribution per unit

Question 4

on a break even chart what does the y-axis show?

Answer 4

the y-axis is used to show cost and revenue

Question 5

where does the total costs start from on a graph?

Answer 5

it starts from the horizontal line which is the fixed costs

Question 6

where is the break even point on the graph

Answer 6

it is the point where total revenue and the total costs cross

Question 7

what is contribution?

Answer 7

contribution is the difference between the variable costs of one unit and its selling price

Question 8

how do you calculate contribution per unit?

Answer 8

selling price - variable costs

Question 9

what is the calculation for total costs?

Answer 9

fixed costs + variable costs

Question 10

what does the break even graph show?

Answer 10

• shows the relationship between fixed costs and variable costs as output rises
• level of output needed to break even, where a profit and loss are made

Question 11

benefits of break even analysis?

Answer 11

• simple and easy to use
• useful guideline to help businesses make decisions
• can decide whether a business is profitable and viable

Question 12

limitations of break even analysis?

Answer 12

• costs are rarely constant
• presumes that it will sell all of its output at the same price
• difficult for businesses which have multiple products

Question 13

what is the margin of safety?

Answer 13

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

Question 14

how do you calculate the margin of safety?

Answer 14

current level of output - breakeven point