2.2.3 Break Even Analysis

Question 1

What is break even point ?

Answer 1

The break even point is where a total revenue earned for a product is equal to its costs
break even point = Fixed costs / contributiion

Question 2

What is contribution?

Answer 2

Contribution = selling price - variable cost per unit

Question 3

What is the margin of safety?

Answer 3

The margin of safety is the difference between the actual level of output and its break even level of output

Question 4

What are the limitations of break even analysis?

Answer 4

• Less useful when the business makes more than one product
• The accuracy of it depends on the data
• Assumes all output is sold
• Break even chats can’t be changed easily when conditions change
• Revenue and total costs do not always have a linear relationship with output