Break even theory

Question 1

What is break even?

Answer 1

Break even is when a business is not making a profit or a loss. Their total revenue is equal to their total costs.

Question 2

What are fixed costs?

Answer 2

Costs which remain the same regardless of units produced or sold e.g. rents and rates. It doesn’t matter if we make one unit or 1,000 units our rent will still be the same.

Question 3

What are variable costs?

Answer 3

These costs chnage directly with production for example they will increase as units produced or sold increase e.g. materials and production wages.

Question 4

What is contribution?

Answer 4

This is the selling price per unit - 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 5

What is the margin of safety?

Answer 5

This is the businesses current production or sales units level - break even units.
This is the extra units the business is producing and selling above and beyound the break even units.
It can be shown in units and sales value.