5.5 Break-even analysis

Question 1

Break even analysis

Answer 1

determines the level of sales needed to cover all costs, where total revenue equals total costs, resulting in neither profit nor loss

Question 2

Contribution per unit

Answer 2

the difference between selling price per unit and variable cost per unit

Question 3

Total contribution

Answer 3

the difference between total sales revenue and total variable costs

Question 4

Break even point

Answer 4

sales volume at which a business’s total revenue equals total costs, resulting in zero profit

Question 5

Break even chart

Answer 5

graphical method that measures the value of a firm’s costs and revenues against a given level of output

Question 6

Targeted profit output

Answer 6

the level of output that is needed to earn a specified amount of profit

Question 7

Benefits of break-even analysis

Answer 7

1. helps visualise a firms profit or loss at various levels of sales
2. helps determine the margin of safety, break even quantity or brea even revenue and cost
3. changes in prices and costs and their impact on profit or loss
4. can be used as a strategic decision-making tool to decide on key investment projects

Question 8

Limitations of break-even analysis

Answer 8

1. assuming constant variable costs and prices
2. ignoring potential changes in market conditions
3. not accounting for economies of scale.