E2 - Break-even Analysis

Question 1

What is break-even and what are its advantages and disadvantages?

Answer 1

It’s when income is exactly equal to expenditure, thus showing neither profit nor loss.

+ Can be used to set targets as a way to motivate employees & can help identify where costs are too high and corrective action can be taken
- Not useful for more than one product as it only takes into account the costs and selling price of the one item.

Question 2

What are the types of costs?

Answer 2

• Variable (vary with level of output)
• Fixed (stay same regardless of output levels)
• Semi-variable (fixed production/consumption levels become variable when exceeded)
• Total (fixed and variable costs together)

Question 3

What are the types of sales?

Answer 3

• Total revenue (income from sale of products/services)
• Selling price per unit (amount a customer pays per unit bought)
• Sales in value (total amount of sales made expressed as a monetary value, e.g. ‘£’)
• Sales in volume (amount of sales expressed as a quantity)

Question 4

What is meant by ‘contribution per unit’?

Answer 4

It’s the amount by which an individual unit sold exceeds its variable costs.