3.3 Costs and Break-even Analysis

Question 1

What is the formula for breakeven?

Answer 1

Fixed Costs/ (Selling Price - Variable Costs)[contribution]= Breakeven

Question 2

How do you construct a breakeven chart?

Answer 2

1. Fixed cost line
2. Variable cost line from origin
3. Revenue from origin
4. total costs from fixed costs

Question 3

What are the advantages of breakeven charts?

Answer 3

1. can find out profit/loss at levels of output
2. can change costs and revenues to change the graph
3. Help calculate safety margin (how much sales cover all costs)
   
   1. Margin safety = produced - breakeven output

Question 4

What are limitations of a breakeven chart?

Answer 4

1. Assumes all units are sold
2. fixed costs are not always fixed, if scale production increased it increases
3. assumes costs are linear