2.2.3 - Breakeven

Question 1

Contribution - Definition

Answer 1

the difference between the selling price and how much it costs to make each item

Question 2

Contribution - Formula

Answer 2

contribution per unit = selling price - variable cost per unit

Question 3

Total Contribution - Formula

Answer 3

total contribution = contribution per unit x number of units sold

Question 4

Break Even - Definition

Answer 4

the level of sales a business needs to cover its total costs - at break even point, total fixed costs + total variable costs = total revenue

Question 5

Break Even - Formula

Answer 5

break even point = total fixed costs / contribution per unit

Question 6

Break Even - Why

Answer 6

• new businesses - tells them how much they need to sell and can aid
  with getting loans
• established businesses - when preparing to launch new products, can
  work out how much profit they will make and predict the impact of this
  on the cash flow

Question 7

Break Even - Influences

Answer 7

• fall in demand
• competitors
• changing production (capital or labour)

Question 8

Break Even - Pros and Cons

Answer 8

+ is easy to do
+ its quick - can see immediately and take quick action
+ lets businesses forecast, how variations in sales, price and costs will
effect how much they need to sell
+ can help persuade sources of finance to give them money
+ helps decided whether new products should be launched
- assumes that variable costs rise steadily - isn’t always the case, can
get discounts for buying in bulk, costs don’t go up in direct proportion
to output
- simple for a single product, but complicated when looking at all
- if data is inaccurate results will be wrong
- break-even analysis assumes all the products are sold
- only tells you how much you need to sell, not how much you will sell

Question 9

Break Even Graphs - Explain

Answer 9

• shows costs and revenue plotted against output
• used to see how costs and revenue vary with different levels of output
• output horizontal, revenue vertical
• fixed costs, total costs and revenue are plotted
• break even point is where the revenue line crosses the total costs line
• can identify profit and loss
• if answer is negative when total costs are subtracted from revenue at
  that amount, there has been a loss

Question 10

Margin of Safety - Definition

Answer 10

margin of safety is the amount between the actual output and breakeven

Question 11

Margin of Safety - Formula

Answer 11

margin of safety = actual output - break-even output