2.2.3 Break Even point

Question 1

What is meant by break even ?

Answer 1

Is the point at which a business is not making a profit or loss, just being able to cover costs

Question 2

What is contribution in business?

Answer 2

Selling price - variable cost

Question 3

What is total contribution

Answer 3

The difference between total sales revenue and total variable costs

Question 4

What is the equation of break even

Answer 4

Fixed costs / contribution

Question 5

What are some fixed costs which businesses experience

Answer 5

• Rent
• Insurance
• Salaries

Question 6

What are some variable costs which businesses experience

Answer 6

• Raw materials
• Wages
• Deliveries

Question 7

What is known as a margin of safety and how is it calculated

Answer 7

-How much actual output is above the break even level of output
- Actual output level - break even output level

Question 8

Where is profit shown on a break even chart ?

Answer 8

To the right of break even point

Question 9

Where is loss shown on a break even chart?

Answer 9

To the left of break even point where sales revenue is lower than total costs

Question 10

What are some advantages of break even?

Answer 10

• Allows business to see how many units they must sell to cover costs which then allow businesses to see if their business will be viable in the future
• Can calculate the level of profit or loss at different levels
• Can provide a target
• Can assist decision making
• Can dictate whether the company must resort to using other sources of finance ( mention in business plan)

Question 11

What are some disadvantages of break even ?

Answer 11

It is based on predicted revenues and costs#

Even fixed costs can vary in reality such as insurance premiums going up due to economic shocks

Ignores changes in selling price or variable costs as items are purchased in large quanitites