7115 · 4.2
Costs, scale of production and break-even analysis — FAQ
Frequently asked questions for 7115 Costs, scale of production and break-even analysis. Direct answers first, then deeper explanation — then practise with marking.
Why use contribution costing for break-even, not full costing?
Break-even is a short-run decision tool. Only variable costs change with output; fixed costs are covered by total contribution. Full (absorption) costing spreads overheads into unit cost and is not appropriate for break-even calculations.
Can break-even be expressed in revenue (£) as well as units?
Yes. Break-even revenue = fixed costs ÷ contribution-to-sales ratio (contribution per unit ÷ selling price). Examiners often ask for units; know both forms.
What if contribution per unit is zero or negative?
If SP ≤ VC, each unit sold loses money on variable costs alone — break-even is impossible at that price. The business must raise price or cut variable costs before break-even analysis is meaningful.