2.2.3 Break-even

Question 1

definition break even

Answer 1

point at which revenue equals cost so business makes neither profit, nor loss

Question 2

BEp formula (expressed in units)

Answer 2

Total revenue (TR)= Total costs (TC)

Question 3

when BEp used

Answer 3

when business starts up –> lots of costs, little revenue –> start to trade, better revenue levels –> need to know when they break even and cover their costs

Question 4

definition contribution (profit)

Answer 4

amount each unit produced “contributes” towards the fixed costs of the business

Question 5

formula contribution

Answer 5

Contribution (C) = Selling price per unit (SP/U) - Variable cost per unit (VC/U)

Question 6

BEp formula (for calculation)
(graph look folder)

Answer 6

Fixed costs (FC) / contribution (C)

Fixed costs (FC) / Selling price per unit (SP/U) - Variable cost per unit (VC/U)

Question 7

Margin of safety definition

Answer 7

amount demand can fall before a loss is made

Question 8

Margin of safety formula (expressed in units (graph look folder)

Answer 8

Actual sales - BEp sales

Question 9

Limitation of BEp analysis

Answer 9

1. Simplistic Assumptions: Assumes all costs are either fixed or variable, which may not reflect reality (e.g., semi-variable costs).
2. Static Prices: Assumes a constant selling price, ignoring discounts or market changes.
3. Single Product Focus: Often designed for a single product, making it less useful for businesses with diverse products.
   4.Fixed Costs Assumptions: Treats fixed costs as constant, even though they can change over time.
4. Ignores External Factors: Doesn’t account for external influences like market demand, competition, or economic conditions.
5. No Time Frame: Doesn’t specify a time frame, making it hard to interpret results in a dynamic environment.

Question 10

benefits of BEp analysis

Answer 10

1. Clear Profit Target: Identifies the sales volume needed to cover costs and start generating profit.
2. Decision-Making Tool: Helps assess the feasibility of new projects or pricing strategies.
3. Cost Control: Encourages businesses to analyze and manage fixed and variable costs.
4. Financial Planning: Aids in setting realistic sales and production goals.
5. Risk Evaluation: Highlights the margin of safety, showing how much sales can drop before a loss occurs.
6. Simple and Visual: Provides a straightforward, easy-to-understand graphical representation of costs, revenue, and profits.

Question 11

profit formula

Answer 11

contribution - fixed costs