Break-Even

Question 1

Break even point

Answer 1

The level of sales a business needs to cover its total costs
New businesses should always work this out to see how much they need to sell to break even

Question 2

Break- Even formula

Answer 2

Break-even point = total fixed costs / contribution per unit

Question 3

Contribution per unit

Answer 3

The difference between selling price of a product and variable costs it takes to produce it

Question 4

Contribution per unit formula

Answer 4

Contribution per unit = selling price - variable costs per unit

Question 5

The Margin of Safety formula

Answer 5

Margin of safety = actual output - break-even point

Question 6

Break even advantages

Answer 6

• Easy to do
• Quick: let’s managers know if the should cut costs or increase sales
• Let’s someone forecast how variations in sales will affect costs, revenue and profits.

Question 7

Break-Even disadvantages

Answer 7

• Assumes that variable costs always rise steadily
• Simple for a single product, not multiple
• Assumes all businesses will sell their products without wastage
• Tells you how many units to sell, not actual products