Break Even

Question 1

What is break even

Answer 1

It compares a firms revenue with its fixed and variable costs to identify the minimum level of sales needed to cover costs.

Question 2

What is the breakeven point

Answer 2

Total costs + total variable costs = total revenue

Question 3

What is the formula for the break even output?

Answer 3

Fixed costs / selling price Per unit - variable cost per unit

Fixed costs / contribution per unit

Question 4

What is a break-even chart?

Answer 4

It is a graph showing the revenue and costs for a business at all possible levels of output. The horizontal axis represents costs for the business and the vertical axis represents costs and sales in pounds.

Question 5

What is the safety of margin

Answer 5

The amount by which demand can fall before the firm starts making losses, it is the difference between the actual and the break-even point

Question 6

How to calculate margin of safety

Answer 6

Sales - Break-even point

Question 7

What are the effects of a price rise on the break even chart

Answer 7

• Its revenue line will rise more steeply than before.
• It will lower the break-even point.
• It will increase the profit potential at each level of output.

Question 8

What is the effect of a rise in variable costs on a break-even chart?

Answer 8

The variable costs line rise most steeply and this will affect the total costs so will the break-even point, you will have to sell more to achieve the break-even output.

Question 9

What are the advantages of break-even analysis

Answer 9

• Estimate the future level of output they will need to produce and sell in order to meet given profit objectives.
• It is easy and quick to do, managers can see the break-even output and margin of safety immediately so they can take quick action is to cut costs or increase sales if they need to increase their margin of safety.
• Business can use break-even analysis to help persuade the bank to give them a loan

Question 10

Limitations of break-even analysis

Answer 10

• The model is too simple. Assumes that variable costs increase constantly, which ignores the benefits of economies of scale
• It assumes that all output is sold, in times of low demand, a firm may have difficulty in selling all that it produces.
• Break-even analysis assumes that the firm sells all of its output at a single price