5.2b Break Even

Question 1

Break-even point definition

Answer 1

Level of output where total revenue = total costs

Question 2

Three methods of calculating break-even level of output

Answer 2

1. Table
2. Formula
3. Graph

Question 3

Break-even point formula

Answer 3

Break-even point = fixed costs ÷ contribution per unit

Question 4

Margin of safety definition

Answer 4

Extent to which output is greater than break-even

See diagram

Question 5

Advantages of break-even analysis

Answer 5

• Can predict profit levels at various levels of output
• Can be used to calculate sales needed to target certain profit levels
• Can examine impact of future changes of price and costs

Question 6

Target profit output formula

Answer 6

Target profit output = (fixed costs + target profit) ÷ contribution per unit

Question 7

Disadvantages of break-even analysis

Answer 7

• Selling price may change due to bulk purchases
• Fixed costs can’t remain the same for every given level of output
• Assumes variable costs always rise steadily - may change due to bulk buying

Question 8

What are the axes on a break-even chart?

Answer 8

• Cost and revenue (vertical)

- Output (horizontal)

Question 9

How to draw a break-even chart:

Answer 9

1. Plot fixed costs
2. Plot total costs
3. Plot revenue
4. Highlight break-even output (where revenue line crosses total costs line)