Unit 5.4 Break-even

Question 1

What is the break-even quantity?

Answer 1

The amount a business must sell to earn enough revenue to just cover its costs so that it does not make a profit or a loss

Question 2

What is the margin of safety?

Answer 2

Actual sales – break-even sales

Question 3

What is the break-even formula?

Answer 3

total fixed costs/ price- variable costs per unit

Question 4

What is the usefulness of break-even analysis in business decision- making?

Answer 4

1) helps plan how much to sell to make profit

2) bank manager will often ask to see a break-even graph as part of a business plan

3) shows a need to increase prices, raise revenue or reduce costs

4) shows margin of safety, assess impact of external changes on margin of safety and on profit or loss

Question 5

What are the limitations of break-even analysis in business decision-making?

Answer 5

1) It assumes that all products are sold for the same price

2) Business costs can change, which in turn will affect the break-even point

3) It assumes that if prices increased, total revenue will increase

Question 6

What is the break-even forecast?

Answer 6

A prediction about the break-even quantity based on estimates of future sales revenues and costs