2.2.3 Break even

Question 1

define break even

Answer 1

when a business generates just enough revenue to cover its total costs

Question 2

define break even chart

Answer 2

a graph containing the total cost and total revenue lines, illustrating the break even output

Question 3

define break even output

Answer 3

the output a business needs to produce so that its total revenue and total costs are the same

Question 4

define break even points

Answer 4

the point at which total revenue and total costs are the same

Question 5

define contribution

Answer 5

the amount of money left over after the variable costs have been subtracted from revenue, the money contributes towards fixed costs and profit

Question 6

define margin of safety

Answer 6

the range of output between the break even level and the current level of output, over which a profit is made

Question 7

formula for unit contribution

Answer 7

contribution per unit= selling price - variable cost

Question 8

explain what contribution is

Answer 8

the difference between the selling price and the variable cost which is used to pay fixed costs like rent, insurance , can measure by unit or total
can be used to calculate break even

Question 9

formula for total contribution

Answer 9

tc = total revenue - total variable cost

Question 10

alternative formula for total contribution

Answer 10

tc = unit contribution x number of units sold

Question 11

explain break even point

Answer 11

its the level of output the business needs to produce and sell to break even
- if the business knows its total costs and selling price they can calculate how many units need to be sold to cover its costs,

Question 12

formula for break even point

Answer 12

total costs (fc +vc) = total revenue

Question 13

formula to calculate break even output

Answer 13

BEO= fixed costs / contribution

Question 14

how can we figure out the margin of safety?

Answer 14

measuring the distance between the break even level output and current level of output

Question 15

how is a break even chart presented?

Answer 15

output along the bottom
cost, revenue, profit along the side
-plot total cost and total revenue

Question 16

what do break even charts show?

Answer 16

if a profit/loss is made
the value of total cost over a range of output
the value of total revenue over a range of output
level of fixed costs/output
break even point
profit at a level of output
the relationship between fixed costs and variable costs as output ^

Question 17

what does the margin of safety show?

Answer 17

the range of output over which a profit can be made

Question 18

what do larger margins of safety ensure?

Answer 18

that if sales drop they might still make profit

Question 19

what do small margins of safety result in?

Answer 19

a risk that the business is more likely to make losses of sales fall

Question 20

how is break even analysis used?

Answer 20

as a tool to make decisions about the future
answers what if questions?
like if the price went up, what would happen to the break-even point?
-used in business plans & can be vital in gaining finance

Question 21

what are some limitations to break even analysis?

Answer 21

-assumes all output and stock is sold
-drawn for a given set of conditions -> can’t cope with a sudden increase in wages and prices
-accuracy depends on the quality of data used to construct cost and revenue functions
-less useful for multi product businesses as there are different fixed costs incurred by each product.

Question 22

what are some strengths of break even analysis?

Answer 22

Allows a business to plan how many products need to be sold in order to make a profit
Provides an aim for the business
Break even information can be used to make judgements about prices and costs -> show a need to increase the price to raise revenue