BUSINESS 5.5 - BREAK EVEN ANALYSIS questions and answers

Definition of Contribution - ans --the sum of money that remains after all direct or variable costs have been taken away from the sales revenue of a product - this surplus can contribute to paying the firm's fixed costs of production Types of contribution - ans --- total contribution - contribution per unit Definition of contribution per unit (unit contribution) - ans --the difference between the selling price of a product and its variable costs of production. surplus goes towards paying fixed costs Formula for contribution per unit - ans --Selling price - Average variable costs Formula for total contribution - ans --(selling price - average variable costs) x Quantity Definition of profit - ans --the positive difference between a firm's total revenue and its total costs Formula for profit - ans --Total contribution - Total fixed costs How to increase profit - ans --- increase sales volume of the product (quantity) which raises the total contribution - reducing variable costs through negotiation better deals with suppliers or finding new suppliers with more competitive prices - Reduce fixed and overhead costs Definition of break even analysis - ans --quantitative tool that can be used for the purpose of determining level of sales needed for a business to earn a profit. needed by new businesses Definition of break even chart - ans --a diagrammatic representation of how total costs and total revenues change with increasing levels of production or sales. shows a firms costs, revenues and profits at various levels of outputs