2.2.3 Break-even

Question 1

What is break-even?

Answer 1

The amount of products that need to be sold

Question 2

What is the formula for break even?

Answer 2

Break-even point = Fixed costs / Contribution

Question 3

What is the formula of contribution?

Answer 3

Contribution = Sales price per unit - Variable cost per unit

Question 4

What is the formula for margin of safety?

Answer 4

Margin of safety = Actual sales - Break-even point

Question 5

What are the limitations of break-even?

Answer 5

1. Too simplistic as assumptions are unrealistic
2. Information used may be unreliable as it is based on assumptions and predictions
3. Sales are unlikely to be the same as output → there may be some build up of stock
4. Most businesses sell more than one product

Question 6

What is the purpose of break-even analysis?

Answer 6

• Focuses on how long it will take before a start up reaches profitability
• Helps understand the level of risk involved in a startup

Question 7

Benefits of break-even analysis

Answer 7

1. It shows whether a product is worth selling or is too risky
2. Shows how many products are needed to sell before profit
3. Helpful for target setting
4. Especially good for new businesses as survival is main aim