2.2.3 Break-even

Question 1

what is the formula for breakeven?

Answer 1

break even = (fixed cost / selling price - variable cost)

aka fixed cost / contribution

Question 2

what is breakeven?

Answer 2

the point at which revenue is equal to cost, neither a profit or loss is made

Question 3

what are the strengths of breakeven?

Answer 3

-focuses on what output is required before a business reaches profitability
-helps management and finance providers better understand the viability of a business/business ideas (is it realistic?)
-helps with decision making

Question 4

what are the drawbacks of breakeven?

Answer 4

-unrealistic assumptions because products aren’t sold at the same price at different levels of output
-more than one product so breakeven is needed for each one
-sales are unlikely to be the same as output (may be a build up of stocks or wasted output)

Question 5

what is the formula for contribution?

Answer 5

contribution =
selling price - variable cost per unit

Question 6

what is contribution?

Answer 6

the amount that each unit produced ‘contributes’ towards the fixed cost of the business

Question 7

what is the formula for margin of safety?

Answer 7

margin of safety = actual sales - breakeven

Question 8

what is margin of safety?

Answer 8

it shows the number of sales a business can lose before break even is reached