Break Even

Question 1

Formula for calculating break even

Answer 1

Fixed costs divided by contribution per unit

Question 2

Calculating contribution?

Answer 2

SPPU- VCPU

Question 3

Margin of safety

Answer 3

• Difference between what is currently being made and what is needed to break-even
• Current output minus break even output
• Positive number is good, negative is bad
• Tells you how much output can fall by before you make a loss

Question 4

What is break-even?

Answer 4

Output where total revenue line crosses total costs line

Question 5

Key steps to doing a break-even chart

Answer 5

1) Plot fixed costs line
2) Plot variable costs line
3) Plot total costs line
4) Plot the total revenue line
5) Highlight the point where total revenue = total costs- this is your break even output

Question 6

Advantages of break- even

Answer 6

• Simple planning tool
• Able to “model” changes, such as increases in costs or reduction in sales price
• Provides a target/ focus for the business owner and staff

Question 7

Disadvantages of break- even

Answer 7

• Assumed that you sell at the same price
• Assumption that you will sell all that you produce
• Assumes that prices will remain the same throughout the period you are looking at
• Method is only good as the quality of the research used to gather the info