Break Even Analysis

Question 1

What is break even?

Answer 1

The point where total revenue = total costs

Question 2

How do you calculate the break even point?

Answer 2

Fixed costs / price - variable costs

Question 3

What is meant by margin of safety?

Answer 3

The difference between the actual sales and break even point providing that sales are greater

Question 4

What is meant by contribution?

Answer 4

What a business needs to earn from selling products in order to cover fixed costs and then make a profit

Question 5

How is contribution calculated?

Answer 5

Price - variable costs

Question 6

What is total contribution?

Answer 6

Contribution of all items sold (x by no. sold)

Question 7

How do you calculate total contribution?

Answer 7

Total revenue - total variable costs

Question 8

What is target level of profit?

Answer 8

The goal profit once break even is calculated

Question 9

How is the number of goods needed to be sold to reach target level of profit calculated?

Answer 9

Fixed costs + target profit / contribution per unit

Question 10

What are the benefits of break even analysis?

Answer 10

• tables and diagrams are easy to view, comprehend and interpret
• beneficial in decision making process (can assess how realistic the chances of meeting that level output would be)
• can be used to set revenue targets
• can see the impact of change on BE point

Question 11

What are the drawbacks of break even analysis?

Answer 11

• using as decision tool but based off predictions - no certainty that VC, FC and prices will be accurate or constant
• direct or variable costs may change with negotiation form suppliers which will alter total costs - new diagram would need to be made
• economies of scale will alter
• unrealistic assumptions - no certainty good will sell and at a constant price at diff output levels
• if more than one product being made - difficult to allocate fixed costs equally