Break Even Analysis

Question 1

Break even definition

Answer 1

The point where revenue received meets all the costs of the business

Question 2

Break even formula

Answer 2

Fixed costs/selling price - variable cost per unit

Question 3

Margin of safety definition

Answer 3

Actual number or units sold over and above the break even point

Question 4

Margin of safety formula

Answer 4

Actual sales in units - break even level of output

Question 5

Break even chart benefits

Answer 5

Straight forward to calculate.
Used to make important decisions.
Used to carry out “what if” analysis which shows impact changes in circumstances could have in a business.

Question 6

Break even chart limitations

Answer 6

Doesn’t have fixed costs into account
Assumes prices stay consistent
Doesn’t take into account unexpected changes.

Question 7

Reasons to use break even

Answer 7

Planning
Monitoring
Control

Question 8

Break even advantages

Answer 8

Business knows how much it needs to sell in order to break even.
Informs pricing decisions.
Targets for motivating employees.
Identifies if costs are too high.

Question 9

Break even disadvantages

Answer 9

Doesn’t take into account variations in cost or selling price.
Forecast sales may not be achieved.
Targets can be set very high.