2.2.3 Break even

Question 1

define break even

Answer 1

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

Question 2

break even calculation

Answer 2

fixed costs divided by contribution

Question 3

define contribution

Answer 3

the amount that each unit produced ‘contributes’ towards the fixed costs

Question 4

contribution calculation

Answer 4

selling price - variable costs

Question 5

define margin of safety

Answer 5

the difference between actual output and the break even output

Question 5

margin of safety calculation

Answer 5

actual sales - break even level of sales

Question 6

uses of break even

Answer 6

• tool to work out what happens if prices/costs go up
• used to write up a business plan
• set sale targets

Question 7

limitations of break even

Answer 7

• assures business only sells one product
• assumes everything made is sold
• doesnt take into account any sales of customers in bulk
• not accurate