Week 11

Question 1

Define Break-even analysis

Answer 1

Break Even Analysis in economics, business, and cost accounting refers to the point in which total cost and total revenue are equal. A break-even points analysis is used to determine the number of units or dollars of revenue needed to cover total costs (fixed and variable costs).

Question 2

What are the limitations of break-even analysis

Answer 2

• Analysis into fixed or variable may be simplistic
• Even if such analysis is possible, accurate data may not be available
• Fixed cost estimate may not be constant/accurate for all volumes
• Variable costs may not be linear
• Selling price may vary for different customers - Only suitable for single / non-varied product
• Assumes sales volume is only influenced on a total cost
• Assumes efficiency (and thus cost) does not vary
• Assumes sale volume = production volume

Question 3

Draw and label a break-even analysis graph

Answer 3