5.5 - Break-Even Analysis Study Guide

A collection of flashcards covering key concepts and formulas related to break-even analysis, useful for exam preparation.

What is the Break-even Point (BEP)?

The level of sales at which total revenue equals total costs, resulting in neither profit nor loss.

How do you calculate Contribution per unit?

Selling price - Variable cost.

What is the formula for total revenue (TR)?

TR = Price x Quantity.

What does Margin of Safety measure?

The amount by which demand exceeds the break-even quantity.

What is the formula for calculating the break-even quantity using variable costs?

Break-even quantity = Fixed Costs / Unit Contribution.

Why is break-even analysis important for businesses?

It helps determine the level of sales needed to cover costs and informs pricing and production decisions.

What financial information does Bea need to know to determine her target profit?

How much profit she might make, how many units to produce, and how much to charge for the selling price.

What are potential limitations of break-even analysis?

Assumptions about linear cost and revenue functions, static nature in a dynamic business environment, data quality issues, and ignoring qualitative factors.

How can changes in price or cost affect the break-even quantity?

An increase in costs or a decrease in price raises the break-even quantity, while a decrease in costs or an increase in price lowers it.

What are the three methods of determining the break-even point?

Unit contribution method, Total revenue = Total cost method, and Drawing a break-even chart.