3.3 Break-even analysis

Question 1

Contribution

Answer 1

difference between the selling price of a product and its variable costs of production

Question 2

Contribution per unit

Answer 2

P - AVC

price - average variable cost

Question 3

Total contribution

Answer 3

(P - AVC) x Q

(price - average variable cost) x quantity of sales

Question 4

Profit

Answer 4

Total contribution - TFC

total contribution - total fixed costs

Question 5

Profit can be increased by

Answer 5

increasing sales of product

–> total contribution

Question 6

Break-even analysis

Answer 6

managemen tool used to calculate the level of sales needed to cover all costs of production

Question 7

Break-even point

Answer 7

TC = TR

Question 8

Margin of safety

Answer 8

difference between a firm’s level of demand and its break-even quantity

Question 9

Benefits of break-even analysis

Answer 9

+ provides a quick graphical focus on the cost and revenue structures of different projects
+ realistic predictions rather than relying on simple guesswork

Question 10

Limitations of break-even analysis

Answer 10

• only suitable for single-product firms that sell all of their products
• other quantitative and qualitative factors that can alter the costs, revenues and output are ignored
  e. g. staff working under increased pressures