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