9609 · 5.4.4
Break-even analysis flashcards
Revision flashcards for Cambridge 9609 Break-even analysis (syllabus 5.4.4). Flip, recall, then mark a real past-paper question.
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What is break-even output?
The level of output at which total revenue equals total cost — zero profit and zero loss.
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Break-even formula (units)?
Break-even output = fixed costs ÷ contribution per unit.
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What is contribution per unit?
Selling price minus variable cost per unit — the amount each unit contributes toward fixed costs and profit.
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What is margin of safety (units)?
Actual or budgeted output minus break-even output — how far sales can fall before the business makes a loss.
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Margin of safety as a percentage?
(Actual output − break-even output) ÷ actual output × 100.
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Output for a target profit?
(Fixed costs + target profit) ÷ contribution per unit.
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What does the break-even chart show?
Fixed costs (horizontal), total cost (FC + variable costs), and total revenue — intersection of TR and TC is break-even.
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Key assumption of break-even analysis?
Selling price and variable cost per unit are constant; costs behave linearly with output.
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Why is a higher margin of safety desirable?
It means the business can absorb a fall in sales before hitting losses — lower risk.
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Limitation of break-even for multi-product firms?
Assumes a single product or constant sales mix — unrealistic when product mix changes.