Using break even analysis to make decisions

Question 1

What is contribution?

Answer 1

This is the difference between sales revenue and variable costs of production.

Question 2

What is contribution per unit?

Answer 2

This is the difference between the selling price of one unit and the variable cost of producing one unit.

Question 3

Equation for total contribution

Answer 3

Unit contribution x number of units sold.

Question 4

What is the break even level of output?

Answer 4

This is the level of output or the number of customers that earns enough revenue to cover total costs of production.

Question 5

What is margin of safety

Answer 5

This is the amount by which the existing level of output is greater than the break even point.