2.2.3 Breakeven

Question 1

Using contribution to calculate the break even point

Answer 1

• The breakeven point is where the total revenue earned for a product is exactly equal to its total costs and where the business is making neither a profit nor a loss
  Break even point = fixed costs/contribution
• Identify the breakeven point allows a business to understand how many times it needs to produce and so to cover all costs before it starts to make a profit

Question 2

Margin of safety

Answer 2

• The margin of safety is the difference between the actual level of output of a business and it’s break even level of output
  Margin of safety = actual level of output – break even level of output

Question 3

Interpretation of breakeven charts

Answer 3

• A breakeven chart is a visual representation of the breakeven point and is used to identify the following
  
  • Fixed costs total costs and revenue over a range of outputs
  • The breakeven point
  • Profit or loss made at each level of output
  • The margin of safety

Question 4

Limitations of breakeven analysis

Answer 4

1. Breakeven analysis is less useful when businesses produce more than one product.
2. Revenue and total costs do not always have a linear relationship with output.
3. The accuracy of breakeven analysis relies upon the quality of data used in breakeven calculations.
4. Even analysis assumes that all output is sold.
5. Breakeven charts cannot be easily amended when conditions (e.g. costs and selling price) change.