Quick questions on Costs and break-even analysis explained: H2 Management of Business

Contribution is the amount each unit contributes toward fixed costs, and then profit, once fixed costs are covered:

The break-even point is the output at which total revenue equals total cost - no profit, no loss. Each unit's contribution chips away at fixed costs, so:

The margin of safety is how far current (or planned) output exceeds break-even - the cushion before the firm starts losing money:

To lower break-even (and raise margin of safety), a firm can raise contribution per unit (raise price, or cut variable cost per unit) or cut fixed costs. Each has trade-offs: raising price may cut demand, cutting variable cost may hit quality, cutting fixed costs may reduce capacity.

Break-even is a clear, quick tool for setting output and price targets, assessing risk (margin of safety), and testing "what if" scenarios. But it rests on simplifying assumptions: that costs split cleanly into fixed and variable and are linear, that selling price is constant at all outputs, that everything produced is sold, and that the analysis is static. Real costs step up, prices vary with volume, and stock builds - so break-even guides decisions but should not be treated as precise. The exam rewards calculating correctly and then critiquing the assumptions.

A product sells for \30 with a variable cost of \18. Calculate the contribution per unit. [2 marks]

Using the figures in Q1, if fixed costs are \$60{,}000, calculate the break-even output. [3 marks]

Analyse why a firm should not rely on break-even analysis alone when making decisions. [6 marks]