2.2.3 Break Even

Question 1

What is the formula for contribution?

Answer 1

Contribution = Selling price - variable cost per unit

Question 2

What is Break-even?

Answer 2

Break-even is the point at which Total Revenue equals Total Costs so the business is making neither a profit or a loss, TR = TC

Question 3

What is contribution?

Answer 3

Contribution is the amount that each unit produced ‘contributes’ towards the fixed costs of the business.

Question 4

What is the full break-even formula?

Answer 4

Fixed costs / Contribution

Question 5

What does the margin of safety show?

Answer 5

The margin of safety calculation shows the number of sales that could be lost before the business makes a loss.

Question 6

What is the margin of safety formula?

Answer 6

Actual sales - break-even level of sales

Question 7

What is the margin of safety?

Answer 7

This is the difference between the break-even point and the current sales.

Question 8

What are the uses of break-even?

Answer 8

• Used as a ‘what if?’ Tool.
• Used to write a business plan
• Used as a start up business to determine when they will stop making a loss

Question 9

What are the limitations of break-even?

Answer 9

• Break even assumes everything that is made is sold, not always the case.
• Break-even does not take into bulk discounts
• The break-even calculations are only as accurate as the data they are based on.