2.2.3. Break-Even

Question 1

Contribution formula

Answer 1

Contribution=Selling price-Variable costs per unit
-Av. Unit costs usually decrease as sales vol. increases as F.C are spread across more units
Profit=(Contribution per unit X units sold) -F.C

Question 2

Break even point

Answer 2

Total F.C+Total V.C=Total revenue
BEP- level of output at which total revenue equals total costs, resulting in neither profit or loss

BEP=F.C\Contribution(selling price-V.C per unit)

Question 3

Margin of safety

Answer 3

MOS=Actual output-BEP level of output
-Shows how far demand can fall before form slips into loss position.

Question 4

Limitations of BEP

Answer 4

Assumes all output is sold
Only useful for one product
VC assumed to increase constantly but may increase more slowly at huger levels of output due to bulk buying