Costs and Break-Even Analysis

Question 1

What is revenue?

Answer 1

The total income from sales.

Formula: Revenue = Price × Quantity sold

Question 2

What are fixed costs?

Answer 2

Costs that do not change with output, e.g. rent, salaries.

Question 3

What are variable costs?

Answer 3

Costs that do change with output, e.g. raw materials, packaging.

Question 4

How do you calculate profit?

Answer 4

Profit = Revenue − Total costs

Question 4

How do you calculate total costs?

Answer 4

Total costs = Fixed costs + Variable costs

Question 5

What is a loss?

Answer 5

When total costs are greater than revenue.

Question 6

What is break-even?

Answer 6

The level of output where total revenue equals total costs — no profit, no loss.

Question 7

How do you calculate break-even level of output?

Answer 7

Break-even output = Fixed costs ÷ (Selling price − Variable cost per unit)

(The amount in brackets is the contribution per unit)

Question 8

What does a break-even chart show?

Answer 8

It shows total revenue, total costs, and the break-even point.

Question 9

How does a change in costs affect break-even?

Answer 9

Higher costs → Higher break-even point

Lower costs → Lower break-even point

Question 10

How does a change in price affect break-even?

Answer 10

Higher price → Lower break-even point

Lower price → Higher break-even point

Question 11

What are the limitations of break-even charts?

Answer 11

Assumes all units are sold (no wastage)

Fixed costs may change over time

Doesn’t account for changing market conditions