2.2.3 : Break-even

Question 1

What is break-even ?

Answer 1

It is the point in which businesses begin to have profit over a loss since it takes away the total costs

Question 2

What is contribution?

Answer 2

It looks at the profit made on individual products. And it is the difference between sales and VCs of production.

Question 3

What do you have to keep the same when doing break-even analysis ?

Answer 3

Selling price per unit stays the same
Variable costs vary in direct proportion to output
Fixed costs do not vary with output

Question 4

What is the margin of safety ?

Answer 4

The margin of safety is the difference between actual output and the break-even output

Question 5

What effects on break-even causes the contribution per unit too lower and the break-even output to increase ?

Answer 5

Lower selling price + Higher variable costs per unit

Question 6

What effects break-even and causes the contribution per unit to increase and the break-even output to lower ?

Answer 6

Higher selling price + Lower variable costs per unit

Question 7

What are the strengths of using break-even analysis in a business ?

Answer 7

Focuses on what output is required before a business reaches profitability
Helps management & finance providers better understand the viability and risk of a business or a business idea
Margin of safety can indicate how optimistic a businesses’s sales forecast are
Illustrates the importance of keeping fixed costs as minimal as possible
Calculations are quick + easy

Question 8

What are the limitations of using a break-even analysis in a business ?

Answer 8

Unrealistic assumptions - products are not sold at the same price at different levels of output
Sales are unlikely to be the same as output
VC do not always stay the same
Most business sell more than one product