Breakeven Point Flashcards

All 7 cards in this deck

What is the break-even level of output?

The level of output where total revenue equals total costs, so the business makes neither a profit nor a loss.

What is contribution per unit and how is it found?

The amount each unit sold contributes to fixed costs: selling price per unit $-$ variable cost per unit.

What are the steps to calculate the break-even level of output?
e.g. fixed costs £400, selling price £10, variable cost £6 per unit

1. Contribution per unit = $10 - 6 = £4$
2. Break-even = fixed costs $\div$ contribution: $400 \div 4 = 100$ units

What is the margin of safety, and how is it calculated?

How far current output is above break-even: actual level of output $-$ break-even level of output.

True or false? On a break-even diagram, the break-even point is where the total revenue line crosses the total cost line.

True. Reading down from that point to the output axis gives the break-even level of output.

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

It rises — more units must be sold to cover the higher fixed costs, so the margin of safety falls.

On a break-even diagram, what does the gap between the total revenue and total cost lines to the left of the break-even point show?

Loss.