5.2b - Break Even

Question 1

Break even point definition

Answer 1

The level of output where total revenue = total costs

Question 2

What are the three methods of calculating break-even output?

Answer 2

• Table
• Graph
• Formula

Question 3

Break-even point formula

Answer 3

Fixed costs / contribution per unit

Question 4

Margin of safety definition

Answer 4

The extent to which output is greater than break-even

Question 5

MoS formula

Answer 5

Expected output - break-even output

Question 6

What are the axes on a break-even chart?

Answer 6

• Cost and revenue (Y)

- Output (X)

Question 7

How do you draw a break-even chart?

Answer 7

1. Plot fixed costs
2. Plot variable costs to get total costs
3. Plot revenue to find break-even output where revenue line crosses total costs line

Question 8

Advantages of break-even analysis:

Answer 8

• Predict profit levels at various levels of output
• Used to calculate sales needed to target certain profit levels
• Examine impact of future changes of price, FC and VC
• Persuade bank to give them a loan by showing they have planned

Question 9

Target profit output formula

Answer 9

(FC + target profit) / contribution per unit

Question 10

Disadvantages of break-even analysis:

Answer 10

• Selling price may change due to bulk purchases
• FC can’t remain the same for every given level of output
• Assumes VC always rise steadily (they change due to bulk buying)
• Sales are often not the same as output (unsold stock)