2.2.3 Break Even

Question 1

Definition: Break-even

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

Question 2

Definition: Contribution

Answer 2

• Contribution is the amount that each unit produced ‘contributes’ towards the fixed costs of the business

Question 3

Contribution formula

Answer 3

C = SP – VC
Where:
C is contribution
SP is selling price per item VC is variable cost per item

Question 4

Full break-even formula

Answer 4

Break even = Fixed cost / contribution

Question 5

What does margin of safety show?

Answer 5

• The margin of safety calculation shows the number of sales that could be lost before the business makes a loss

Question 6

Margin of safety formula

Answer 6

Actual sales minus break-even level of sales

Question 7

What is Margin of safety

Answer 7

• This is the difference between the break-even point and the current sales.

Question 8

Limitations of break-even analysis

Answer 8

• Break - even assumes everything that is made is sold, this is not always the case
• The break - even calculations are only as accurate as the days they are based on
  -Break - even does not take into account any sales discounts if customer if customers by in bulk

Question 9

Uses of break even

Answer 9

• 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 business to write their business plan

Question 10

What is revenue?

Answer 10

Revenue (turnover)- income received into the business, calculated by Quantity x Price (Q x P)