Using Break-even Flashcards

All 6 cards in this deck

What happens to break-even output if fixed costs increase?

Break-even output rises — more units must be sold to cover the higher costs.

What happens to break-even output if the selling price is increased and costs stay the same?

Break-even output falls — each unit sold contributes more towards covering fixed costs.

What happens to break-even output if the variable cost per unit rises?

Break-even output rises — each unit contributes less towards fixed costs, so more must be sold.

State one benefit to a business of using break-even analysis.

It shows how many units must be sold to cover costs, so output and sales targets can be set.

State one limitation of using break-even analysis.

It assumes price and costs stay constant and that everything produced is sold, which is often unrealistic.

True or false? A business with a large margin of safety is less at risk of making a loss if sales fall.

True. Output can fall a long way before it drops to the break-even level.