2.2.3 - Break-Even

Question 1

Define Break-Even?

Answer 1

Break-even is the point at which Total Revenue equals Total Costs so the business is making neither a profit nor a loss, TR=TC.

Question 2

Define Contribution?

Answer 2

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

Question 3

How do you calculate contribution?

Answer 3

Contribution = Selling Price - Variable Cost

Question 4

How do you calculate break-even?

Answer 4

Fixed Costs / Contribution

Question 5

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

Question 6

How do you calculate the margin of safety?

Answer 6

Actual sales - break-even level of sales

Question 7

Name the uses of break-even?

Answer 7

• Used as a ‘What If?’ tool to work out what happens if prices or costs go up.
• Used by a business that is starting up to work out when they will stop making a loss
• Used by business to write their business plan

Question 8

Name limitations of break-even?

Answer 8

• Break-even assumes everything that is made is sold, this is not always the case
• Break-even does not take into account any sales discounts if customers buy in bulk
• The break-even calculations are only as accurate as the data they are based on