2.2.3 Break even

Question 1

Break even

Answer 1

Point where business isn’t making a profit or a loss
TR=TC
Breakeven output = number of items a business must sell to reach this point

When looking at breakeven we should be concerned with:
At what level of production does breakeven take place
What is the effect on breakeven with changes in the business

Question 2

Contribution

Answer 2

Looks at profit made on individual products
It is used in calculating how many items need to be sold to cover all the businesses total costs
The difference between sales ad variable costs of production

Question 3

Breakeven calculations

Answer 3

contribution per unit = revenues - variable costs ***
total contribution = contribution per unit X number of units sold
profit = contribution - fixed costs
break even output = fixed costs - contribution per unit ***
margin of safety = actual level of output - breakeven level of output

Question 4

margin of safety

Answer 4

difference between actual level of output and the breakeven level of output
formula = actual level of output - breakeven level of output

Question 5

strengths of breakeven

Answer 5

+ provides a target
+ aids decision making
+ integral for business plan and seeking finance
+ allows to calculate minimum sales needed
+ before making profit cn se if venture is viable
+ quick and easy calculation

Question 6

weaknesses of break even

Answer 6

• based on predicted costs and revenues
• only indicates sales needed - doesn’t product
• even fixed costs can vary - vulnerable ti external shocks
• most businesses sell more than 1 product - may use averages = inaccurate