ch 28 break-even analysis

Question 1

define amortization.

Answer 1

is a cost associated with the falling in value of certain types of assets.

Question 2

define break-even point.

Answer 2

level of output where total costs and total revenue are exactly the same: neither a profit or a loss is made.

Question 3

what information is needed to calculate the break-even point?

Answer 3

• fixed cost
• selling price per unit
• variable cost per unit

Question 4

how do you calculate the break-even point?

Answer 4

fixed cost / (selling price - variable costs per unit)

Question 5

define break-even chart.

Answer 5

graph that shows total cost and total revenue, break-even point is where total cost and total revenue intersect.

Question 6

define margin of safety.

Answer 6

amount of output available to be sold above the break even point where the business makes a profit.

Question 7

recite the steps on constructing a break-even chart.

Answer 7

1. calculate the break-even point
2. calculate two sets of total revenue and total cost
3. plot the graph

Question 8

define bulk buying.

Answer 8

buying goods in large quantities, which is usually cheaper than buying in small quantities.

Question 9

define stockpile.

Answer 9

large supply of goods and so forth that are being kept for use or possible use in the future.

Question 10

what does a break-even chart show?

Answer 10

• how much output a business has to produce in order to break even
• the costs, revenue, and profit at different levels of output
• the margin of safety

Question 11

what are the limitations of a break-even chart?

Answer 11

the total cost and total revenue are shown as straight lines.
- a business may have to offer discounts on large orders
- bulk buying may reduce the total cost

it is assumed that all output is sold and no stocks are held. there are times when firms cannot sell what they produce and choose to stockpile their output.

if the data is poor and inaccurate, the conclusions drawn on the basis of the data will be wrong.

Question 12

what happens to the break-even point if the price increases?

Answer 12

total revenue will be steeper and the break-even point will shift to the left.

Question 13

what happens to the break-even point if the price decreases?

Answer 13

total revenue will be flatter and the break-even point will shift to the right

Question 14

what happens to the break-even point if the fixed cost is higher?

Answer 14

total cost will move upward with the steepness unchanged and the break even point will shift to the right.

Question 15

what happens to the break-even point if the fixed cost is lower?

Answer 15

total cost will move downward with the steepness unchanged and the break even point will shift to the left.

Question 16

what happens to the break-even point if the variable cost is higher?

Answer 16

total cost will be steeper and the break even point will shift to the right.

Question 17

what happens to the break-even point if the variable cost is lower?

Answer 17

total cost will be flatter and the break even point will shift to the left.