5.5 - Break even Analysis

Question 1

Revenue (R)

Answer 1

• Income made from the sale of goods or services
• P x Q

Question 2

Fixed Costs (FC)

Answer 2

• Costs that do not change with output
• E.g. rent, property tax, marketing

Question 3

Variable costs (VC)

Answer 3

• Costs that change with output (increases as quantity increases)
• Cost of input, e.g. labor, materials, meat + onions
• TVC = Q x (VC per unit)

Question 4

Total Costs (TC)

Answer 4

TC = TFC + TVC

Question 5

Profit

Answer 5

Revenue - Total Costs

(P x Q) - FC - (VC x Q)

Question 6

Break-even quantity

Answer 6

• The quantity at which total costs = total revenue, so profit is zero
• The quantity a business must sell to cover its costs
• Above this quantity, the business must make a profit

Question 7

Break-even quantity formula

Answer 7

• BEQ = FC/(P - VC)
• Fixed Costs / Price - Variable costs
• BEQ = FC/CPU

Question 8

Contribution per unit (CPU)

Answer 8

• The profit made from selling each product
• CPU = Price - VC
• If CPU is negative → every time they sell, they make a loss → never break even

Question 9

Margin of safety (MOS)

Answer 9

• The amount by which the actual output exceeds the BEQ
• Actual output - BEQ