Chapter 5.5 - Break even analysis

Question 1

Break-even analysis

Answer 1

A decision-making tool used to calculate the level of sales needed to cover all costs of production. Any sales beyond the break-even point generate a positive safety margin and hence profits for the business

Question 2

Break-even chart

Answer 2

A diagrammatic representation of a firm’s costs, revenues, and profits (or loss) at various levels of output

Question 3

Break-even point

Answer 3

Refers to the position on a break-even chart where the total cost line intersects the total revenue line. This is shown at the point where TC = TR

Question 4

Break-even quantity

Answer 4

Refers to the level of output that generates neither profit nor loss. It is shown along the x-axis on a break-even chart

Question 5

Contribution

Answer 5

Refers to the sum of money that remains after all direct or variable costs have been deducted from the sales revenue of a product

Question 6

Contribution per unit (Unit contribution)

Answer 6

The difference between the selling price of a product and its variable costs of production

Question 7

Loss

Answer 7

Exists when the firm’s total costs exceed its total revenues (TC > TR). This occurs at all levels of output or sales below the break-even quantity

Question 8

Margin of safety

Answer 8

The difference between a firm’s actual sales quantity and its break-even quantity. A positive safety margin means the firm can reduce output (sales volume) by the amount without making a loss

Question 9

Profit

Answer 9

The positive difference between a firm’s total revenue and its total costs. Profit is shown in a break-even chart at all levels of output the break-even quantity

Question 10

Target price

Answer 10

The price set by a firm in order to reach break-even or a certain target profit

Question 11

Target profit

Answer 11

The amount of surplus a firm intends to achieve, based on price and cost data. It is calculated by deducting total costs from expected sales revenues

Question 12

Target profit output

Answer 12

The sales volume or level of output required to achieve the target profit that business managers expect to achieve by the end of a given time period

Question 13

Total contribution

Answer 13

The unit contribution (P-AVC) multiplied by the quantity of sales (Q. Hence, total contribution = (P-AVC) x Q