Booklet 8:Break-Even Analysis

Question 1

What is the break even point and how to calculate it? (4)

Answer 1

The break even point is when the Total Costs = Total Revenue. At the break even point, the business is neither making a profit nor a loss.

Fixed costs / Contribution per unit (Selling price - Variable costs)

Question 2

What is Fixed costs? (4)

Answer 2

Fixed costs do not increase as output increases and they do not change if sales revenue increases or decreases.

Question 3

What is Variable costs? (4)

Answer 3

Variable costs are directly linked to output/sales revenue of a business. They increase as output increases.

Question 4

What is Total costs and how to calculate it? (4)

Answer 4

Total costs is the economic cost of production.
Fixed costs + variable costs * no of unit

Question 5

What is Total Revenue? (4)

Answer 5

Total Revenue is earnings or income that is generated by a firm as a result of its trading activities.

Question 6

How to calculate Target Profit Level? (4)

Answer 6

(Total fixed costs + target profit) / Contribution per unit

Question 7

What is the margin of safety answer how to calculate it? (4)

Answer 7

The margin of safety shows the difference between the current output of the business and the break even level of output.

Existing or expected output - break-even output

Question 8

If the selling price of a product increases….

Answer 8

The break-even point will decrease.

Question 9

If fixed costs increase……

Answer 9

The break-even point will increase.

Question 10

If variable costs increase…..

Answer 10

The break-even point will increase.

Question 11

2 advantages and 2 disadvantages of the usefulness of break-even analysis (18)

Answer 11

Advantages
1.Good budget planning approach
2.Management will be able to see how many units they need to produce to break-even.

Disadvantages
1.Many of the factors are estimates
2.Unpredictable events can occur.