Break even analysis

Question 1

What is break even?

Answer 1

Break even is when we are not making a profit or a loss. Our total revenue is equal to our total costs

Question 2

What is total revenue?

Answer 2

Units x selling price

Question 3

What are the total costs?

Answer 3

Fixed costs + variable costs

Question 4

What is made when total revenue is greater than total costs?

Answer 4

If total revenue is greater than total costs a profit is made?

Question 5

What is made if total revenue is less than total costs?

Answer 5

If total revenue is less than total costs a loss is made.

Question 6

What is the definition of fixed costs?

Answer 6

Costs which remain the same regardless of units produced or sold eg rent and rates. It doesn’t matter if we make one unit or 1000 units our rent will still be the same,

Question 7

What is the definition of variable costs?

Answer 7

These costs change directly with production ie they will increase as units produced or sold increase eg materials and production wages.

Question 8

What is the definition of contribution?

Answer 8

This is our selling price- variable cost per unit OR sales revenue - total variable costs.

The contribution goes towards covering the fixed costs. Once the fixed costs are covered by the contribution then the business will start to make a profit.

Question 9

What is the definition of margin of safety?

Answer 9

This is our current production or sales units level - break even units.

This is extra units the business is producing and selling above and beyond the break even units.

It can be shown in units and sales value.

Question 10

What is the selling price price per unit?

Answer 10

Selling price per unit is how much the business charges the customer for each unit produced.