10 Questions
What does the horizontal line for fixed costs on a break-even chart represent?
No change in fixed costs
Explain the significance of calculating the margin of safety in business.
It shows how much sales can fall without causing losses.
What are some limitations of using break-even analysis in decision-making?
Not all costs can be easily categorized, and it assumes all output is sold.
How can a business use cost data to improve profitability?
By duplicating successful strategies in different branches or sectors.
How can managers use the concept of contribution in deciding on special orders?
Managers can determine if additional contribution will cover fixed costs before making a profit.
Why is it important for managers to observe costs over time?
To identify and rectify underlying problems that may lead to an increase in costs.
What is the importance of break-even analysis?
Helps in deciding whether a new product will be viable or profitable, supports loan application to financial institutions, assesses profitability of entering a new market, assesses impact of different prices on profitability, helps make decisions related to location, new equipment, and projects.
Define break-even output.
Break-even output is the level of output at which sales generate just enough revenue to cover total costs.
How is break-even calculated?
Break-even output = Fixed costs / (Selling price per unit - Variable costs per unit).
What does the margin of safety represent in break-even analysis?
The margin of safety represents the difference between actual sales and the break-even point.
Understand the graphical representation of fixed costs, sales revenue, variable costs, and total costs. Learn how to interpret different scenarios based on the break-even point.
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