Breakeven Analysis

Question 1

What are fixed costs?

Answer 1

Costs which are not affected by the quantity of goods produced or sold or by the scale of services rendered. Called fixed because they don’t alter regardless of the volume of the work done. E.g. rent and mortgage

Question 2

What are variable costs?

Answer 2

Costs which vary according to the level of work being done. E.g. wages, electricity and raw materials

Question 3

How to calculate total costs?

Answer 3

Fixed costs + variable costs

Question 4

What is breakeven?

Answer 4

A business’s breakeven point is where its total costs equal the total of its sales revenue, it’s the minimum point at which the business can survive.

Question 5

Significance of the breakeven point

Answer 5

It can show the amount of goods which must be sold in order to make profit.
Shows the level of costs which the business can bear.
Shows the price which needs to be charged for goods.

Question 6

How to calculate breakeven?

Answer 6

Total fixed costs divided by selling price per unit - variable cost per unit.
If a businesses breakeven point is 800 this means they must sell 800 units every month to break even.

Question 7

What is the margin of safety?

Answer 7

The amount which a business sells in excess of its breakeven point