10.2 Break-even analysis

• The break-even formula calculates the number of units required to cover total costs.
• The contribution margin is calculated by subtracting fixed costs from revenue.

  False
• The break-even point in sales value is found by multiplying the break-even point in units by the unit selling price.
• Break-even analysis can only be applied to manufacturing businesses.

  False
• What do total fixed costs represent in the break-even formula?

  Costs that don't change
• The break-even point is where a business's total revenue equals its total costs.


  True
• Match the break-even formula term with its calculation:

  Total Fixed Costs ↔️ No formula; given value

  Contribution Margin per Unit ↔️ Selling Price per Unit - Variable Cost per Unit

  Break-Even Point (Units) ↔️ Total Fixed Costs / Contribution Margin per Unit
• The contribution margin formula is: Unit Selling Price minus Unit Variable Cost.
• The break-even point is where a business starts making a profit.

  False
• What is the formula for calculating the break-even point in units?

  Total Fixed Costs / Contribution Margin per Unit
• How is the contribution margin per unit calculated?

  Selling Price - Variable Cost
• What are examples of fixed costs?

  Rent, insurance, administrative salaries
• Understanding the contribution margin helps businesses determine the profitability of each unit sold.


  True
• The break-even point in units is calculated as total fixed costs divided by contribution margin per unit
• Match the component with its description:

  Contribution Margin Ratio ↔️ Percentage of revenue covering fixed costs

  Break-Even Point in Sales Value ↔️ Total revenue needed to break even
• What does the total revenue line in a break-even chart show?

  How revenue changes with sales volume
• Steps for interpreting a break-even chart

  1️⃣ Identify the break-even point

  2️⃣ Determine the loss zone

  3️⃣ Determine the profit zone

  4️⃣ Analyze the relationship between costs and revenue
• Break-even analysis can help identify cost reduction opportunities.


  True
• What is the break-even point in business terms?

  No profit or loss
• What are fixed costs in break-even analysis?

  Costs that don't change
• How do you calculate the break-even point in units?

  Fixed costs / contribution margin
• What does a break-even chart help a business understand?

  Profitability at different sales levels
• Steps to calculate the break-even point in units

  1️⃣ Identify fixed costs

  2️⃣ Calculate contribution margin

  3️⃣ Determine break-even point in units
• The contribution margin per unit is calculated by subtracting the unit variable cost from the unit selling price.
• Why are total fixed costs important in break-even analysis?

  They don't change with sales
• Variable costs remain constant regardless of production volume.

  False
• What does the break-even point in units indicate?

  Units to cover all costs
• Steps to calculate the break-even point in units

  1️⃣ Identify total fixed costs

  2️⃣ Calculate contribution margin per unit

  3️⃣ Apply the break-even formula
• Total fixed costs are costs that do not change with the level of sales
• If the selling price per unit is $50 and the variable cost per unit is $30, the contribution margin per unit is $20.


  True
• Contribution margin is calculated as unit selling price minus unit variable cost
• What does the break-even point in units represent?

  Units to cover all costs
• If total fixed costs are $50,000 and contribution margin per unit is $20, what is the break-even point in units?

  2,500 units
• A break-even chart shows the relationship between costs and revenue at different levels of production.

  True
• The profit zone in a break-even chart is above the break-even point
• Match the application of break-even analysis with its benefit:

  Pricing Strategies ↔️ Determines minimum selling price

  Cost Management ↔️ Highlights impact of reducing costs