2.2.3 Break Even

Question 1

How do you calculate contribution and what does it mean?

Answer 1

Price- Variable cost

The difference between the variable cost of one unit and the selling price.

Question 2

How do you calculate Break even point?

Answer 2

fixed costs / price- variable cost

Question 3

How do you calculate margin of safety and what does it mean?

Answer 3

Output - Fixed costs/ price - variable cost

The size of the MOS will determine the risk of the business, it should be as high as possible.

Question 4

what are the uses of break even analysis?

Answer 4

• To decide whether or not a business idea is profitable and viable
• to assess levels of output and sales necessary to generate profit
• to assess effects of costing and pricing decisions.
• To assess changes in level of production

Question 5

What are the pros of break even analysis?

Answer 5

• simple and easy to use
• useful guide to help businesses make decisions
• To persuade sources of finance to give them some money
• can be used to analyse the impact of varying prices adn costs on a businesses profit.

Question 6

What are the cons of break even analysis?

Answer 6

• assumes variable costs will rise with output which is not always the case
• assumes the business will sell all the products without any waste
• Most businesses sell multiple products which can make break even a lot more complicated