2.2.3 Break Even

Question 1

What is the break even point?

Answer 1

• Where total revenue earned for a product is exactly equal to its total costs & where the business is making neither a profit or a loss

Question 2

What is the formula for break even point?

Answer 2

BEP= Fixed Costs/Contribution

Question 3

What is the margin of saftey?

Answer 3

• The difference between the actual level of output of a business & its break even level of output

Question 4

How do you calculate the margin of saftey?

Answer 4

Actual level of output - Break even level of output

Question 5

What are the limitations of break even analysis?

Answer 5

• Break even analysis is less useful where businesses produce more than one product
• The accuracy of break even analysis relies upon the quality of data used in break even calculations
• Break even analysis assumes that all output is sold
• Break even charts cannot be easily amended when conditions (e.g. cost & selling price) change
• Revenue & total costs do not always have a linear relationship w output

Question 6

Why should break even analysis be included in a business plan?

Answer 6

• When a business is trying to secure external finance
• Businesses looking to borrow money or attract investors seeking to manage their risk should take care to model the break even point, margin of safety & level of profit (or loss) at different levels of output & be prepared to be scrutinised on the figures.

Question 7

What is the contribution value used for?

Answer 7

• To calculate the break even point