break even analysis

Question 1

what is break even?

Answer 1

it is the level of output necessary to cover all costs, it is the point where total revenue is equal to total costs.

Question 2

what is the break even formula?

Answer 2

contribution per unit

Question 3

what is contribution formula?

Answer 3

price per item - variable costs

Question 4

what is the margin of safety?

Answer 4

the difference between the actual output and the the break-even level.

Question 5

how do you work out the margin of saftey?

Answer 5

actual output - breakeven level

Question 6

pros of using break even analysis?

Answer 6

• they’re easy to view, comprehend and interpret
• beneficial management tool to aid the decision making process, this is especially true for new businesses which can use break even analysis as part of it’s business plan
• it can be used to show the level of profit at a given level of output
• its possible to determine the impact of changes through looking at the margin of saftey.

Question 7

what are the con’s of using break even analysis?

Answer 7

• it is based on using predicted figures. there is no certainty that the figures are accurate as they may change
• direct and variable costs may change depending on the quantities involved
• as production levels increase the opportunities to gain EOS will have an impact on the unit cost
• if there is more than one product or service involved it becomes difficult to allocate the fixed costs (absorption )
• there is the assumption that as revenue increases sp does the price

Question 8

what formula might businesses want to do as not many businesses want to breakeven they want to be profitable?

Answer 8

• ## Fixed costs + profit desiredcontribution.