2.2.3 - Break Even

Question 1

What does Break-Even mean

Answer 1

• Break-even is the point at which Total Revenue equals Total Costs so the business is making neither a profit nor a loss, TR=TC
• When a business starts up, the owner may invest their money in; equipment, fixtures, fitting or machinery
• At the start of the business there will be little or no revenue, and lots of costs
• The business will start to trade and then better revenue levels can be made
• The business will need to know at what point they break-even and cover their costs

Question 2

What is Contribution

Answer 2

• Contribution is the amount that each unit produced ‘contributes’ towards the fixed costs of the business
• Contribution = Selling Price (per item) - Variable Cost (per item)

Question 3

What is the break even formula

Answer 3

Fixed Costs / Contribution

Question 4

What does margin of safety show

Answer 4

• The margin of safety shows the number of sales that could be lost before the business makes a loss
• difference between the break even point and the current sales
• Surplus of planned revenue over planned costs to allow for unforeseen developments

Actual Sales - break even level of sales

Question 5

what are the uses of break even analysis

Answer 5

• Used as a “what if ?” tool to work out what happens if prices or costs go up
• Used by a business that is starting up to work out when they will stop making a loss
• Used by a business o write their plan

Question 6

what are the limitations of break even analysis

Answer 6

• Assumes everything that is made is sold, this is not always the case
• does not take into account any sales discounts if customers buy in bulk
• the calculations are only ass accurate as the data they are based on