Break even analysis

• What is the formula for break-even analysis?

  Total Revenue = Total Costs
• What does break-even analysis indicate for a business?

  It shows when profit equals loss
• If Co. A sells 100 units at £10 each, what is the total revenue?

  £1,000
• What is the variable cost per unit for Co. A?

  £6
• What are fixed costs in the context of Co. A?

  £400 per week
• How do you calculate profit or loss for Co. A?

  TR - TC
• What does break-even output refer to?

  Units needed to cover total costs
• What is the purpose of break-even analysis?

  Planning tool for production management
• What are the two types of costs in break-even analysis?

  Variable and fixed costs
• What does the break-even chart represent?

  Costs and income at various activity levels
• What is the break-even point on a chart?

  Where total revenue equals total costs
• What happens to profit if capacity is increased?

  Profit may increase or decrease
• What is the margin of safety?

  Difference between actual sales and break-even sales
• What are the strengths of break-even analysis?

  • Focuses on time to profitability
  • Assesses business viability
  • Calculates margin of safety
  • Evaluates risk in startups
  • Emphasizes minimizing fixed costs
  • Quick and easy calculations
• What are the limitations of break-even analysis?

  • Unrealistic price assumptions
  • Fixed costs may vary with output
  • Sales may differ from output
  • Variable costs can change
  • Complexity with multiple products
  • Planning aid, not decision-making tool
• What is the definition of contribution in business?

  Returns from each unit sold
• How is total contribution calculated?

  Total Sales - Total Variable Costs
• What is the formula for contribution per unit?

  Selling price per unit - Variable costs per unit
• How can total contribution also be calculated?

  Contribution per unit x number of units sold
• What is the break-even quantity formula?

  Fixed costs / Contribution per unit
• What does the break-even quantity formula help determine?

  Number of units to cover fixed costs
• How do you work out total contribution?

  Total revenue- total variable costs
• How is selling price calculated?

  Revenue/ Quantity sold
• How is variable cost per unit calculated?

  Variable costs/ Quantity sold
• When do two break even chart lines have the same break even?

  Same contribution and same fixed costs