3.5 Break Even Analysis

Question 1

Fixed costs (FC)

Answer 1

Costs that don’t change with the level of output e.g. rent, insurance wages

Question 2

Variable costs (VC)

Answer 2

Costs that can change directly and proportionately with the level of output e.g. shipping, material

Question 3

Total costs (TV)

Answer 3

Fixed costs + total variable costs

Question 4

Revenue

Answer 4

Selling price per unit x quantity sold

Question 5

Limitations of break even analysis

Answer 5

• assumes all costs and revenues are linear
• assumes all units are produced and sold
• fixed costs may not remain fixed at all output levels
• ignores qualities factors (demand, competition)