2.2.3 Break-even

Question 1

Break-even

Answer 1

Break-even describes a
position where a business is
selling just enough to cover
its costs without making a
profit.

Question 2

Break-even Formula

Answer 2

Fixed costs/ (selling price - variable cost per unit)

Question 3

Break-even graph- On the horizontal axis,

Answer 3

all

possible levels of output are shown,

Question 4

Break-even graph- vertical axis

Answer 4

the vertical axis shows costs and

revenues, measured in pounds.

Question 5

Margin of Safety

Answer 5

The horizontal distance between the actual output of a business and its
break-even output is called the margin of safety. This shows how far
demand can fall before the firm slips into a loss-making position and can
be a vital figure to look out for during difficult trading periods.

Question 6

Why is break-even analysis useful

Answer 6

serve useful planning purposes-
Being able to read off profit or loss at any given level of output can help a
business plan for success or failure. Can answer what if questions- what would happen to profit, break-even or margin of safety if:
• selling price is reduced or increased
• variable cost per unit reduces or increases
• fixed costs change.

Question 7

Limitations of break-even analysis

Answer 7

Break-even analysis relies on certain simplifying assumptions. These may
well be false in a real, dynamic business environment:
• Variable costs are assumed to increase constantly. In fact, they may
increase more slowly at higher levels of output due to bulk-buying
discounts.
• Break-even analysis assumes that the firm sells all its output in the same
time period, which may well be untrue.
• Break-even analysis is based on a firm selling only one product at a
single price. • Any break-even chart is a static model, showing only the possible
situation at one moment in time. The business environment is
dynamic, so break-even is not well suited to showing the effects of
changing external variables such as consumer tastes or the state of the
economy.

Question 8

Advantages of break-even 2

Answer 8

it shows how many products they need to sell to ensure a profit. it shows whether a product is worth selling or is too risky. it shows the amount of revenue the business will make at each level of output.
t shows whether costs need to be reduced to lower the BEP
it can be used to persuade investors or banks to finance a business
it is quick and easy to analyse

Question 9

Drawbacks bite size

Answer 9

break-even assumes a business will sell all of the stock (of a particular product) at the same price
businesses can be unrealistic in their calculations
variable costs could change regularly, meaning the analysis could be inaccurate
they can be time consuming to create

Question 10

Margin of safety bitesize

Answer 10

The margin of safety is the amount sales can fall before the break-even point is reached and the business makes no profit. This calculation also tells a business how many sales they have made over their break-even point (BEP). The larger the margin of safety, the lower the risk for a business.

Question 11

The break-even output is reached when

Answer 11

Total revenues = total costs

Question 12

Margin of Safety formula

Answer 12

Actual output- break even output