2.2.3 Break Even

Question 1

Definition of break even

Answer 1

When a business generates just enough revenue to cover its costs.

It’s expressed as an amount of output NOT money, eg 250 units

Question 2

Definition of contribution

Answer 2

The amount of money left over after variable costs have been subtracted from revenue.
The money contributes towards fixed costs and profit.

Question 3

How do you calculate contribution?

Answer 3

Selling price - variable cost

Question 4

What is the full break even formula?

Answer 4

Fixed costs / contribution

Question 5

In a break even chart, where does the total revenue line start?

Answer 5

At £0

Question 6

On a break even chart, where is the break even point?

Answer 6

Where the total revenue and total cost lines meet/cross over

Question 7

What sections of a break even chart do you shade in?

Answer 7

The profit and loss sections

Question 8

Definition of margin of safety

Answer 8

The range of output between the breakeven level and the current level of output, over which a profit is made

Question 9

What does the margin of safety show?

Answer 9

Shows the number of sales that could be lost before the business makes a loss.

Question 10

How do you calculate the margin of safety?

Answer 10

Sales volume - break even output

Question 11

What are the uses of break even?

Answer 11

• helps work out what happens if prices or costs go up
• used by new businesses to work out when they will start making a loss
• helps write a business plan

Question 12

What are the limitations of break even?

Answer 12

• time consuming
• it assumes that all output is sold
• chart can’t cope with sudden increase in wages, prices
• assumes total revenue and total cost lines are linear (not always)