3.3

Question 1

Break even definition

Answer 1

is a common business management tool used by start- ups and firms deciding on whether to invest in certain projects or products.
It is used to determine the level of sales needed in order to cover all the costs associated with the output of a particular good or service.

Question 2

Contribution definition

Answer 2

Is the surplus of revenue over variable costs a business makes that goes towards paying fixed costs.

Question 3

Total contribution definition

Answer 3

Is found by subtracting the total variable cost from total sales revenue
Only takes away variable costs from sales revenue

Question 4

Total contribution formula

Answer 4

Total contribution = total revenue-total variable cost

Question 5

Contribution per unit definition

Answer 5

Is the surplus of the selling price of a product over the unit variable cost of producing it
The contribution per unit is a useful financial statistic because it tells a businessthe financial implications of selling more units or fewer units

Question 6

Contribution per unit formula

Answer 6

Contribution = selling price per unit - variable cost per unit
(P-avc)

Question 7

Total contribution by contribution per unit

Answer 7

Total contribution = contribution per unit x number of units sold
(P-avc) x p

Question 8

Used to pay fixed costs

Answer 8

The difference between firm’s selling price and its average variable cost

Question 9

Break -even occurs when

Answer 9

A firms total contribution equals to total fixed costs

Question 10

Profit or loss by contribution

Answer 10

When you take away fixed costs from total contribution
Profit= [ (p-avc) x q]-Tfc

Question 11

Revenue formula

Answer 11

Price x quantity

Question 12

Total costs formula

Answer 12

Fixed costs + variable costs

Question 13

Variable costs formula

Answer 13

Variable x quantity

Question 14

Profit/loss formula

Answer 14

Revenue- total costs

Question 15

Increasing profit

Answer 15

• increasing sales of the product,which raises the total contribution (gross profit)
• reducing fixed costs, perhaps through negotiating better deals with current suppliers or seeking new suppliers that are more competitive
• reducing fixed costs and over heads, perhaps through better financial control or the use of costs and profit centres

Question 16

Unit contribution vs value added

Answer 16

Unit contribution = price - average variable costs
P-avc
Value added per unit = price - average total costs
P-ate

Value added Considers both variable and fixed costs of production
Aunt contribution only considers the cost of goods sold (COGS) or the variable cost

Question 17

6 ways contribution analysis is useful for businesses

Answer 17

Pricing strategy - helps set prices for each product so enough contribution is made towards payment of fixed and indirect costs
Product portfolio management- helps managers decide whichproducts should be investment priority
Allocation of overheads to cost and profit centres
Make-or-buy decisions - can help businesses decide whether it should produce the product on buy them from suppliers
Special order decisions -when customers place an order at a price that differs from the normal price changed by the business e.g. Buys more the analysis help making decisions
Break even analysis

Question 18

Break-even quantity definition

Answer 18

The level of output of which total costs equal total revenue

Question 19

Margin of safety

Answer 19

The amount in which sales level exceeds the break- even level of output

Question 20

Break-even revenue

Answer 20

The remount of revenue needed to cover both fixed and variable costs so that the business breaks even
Break even quantity x price

Question 21

Business can be only in one of the situations of art point in time

Answer 21

Loss- when cost of production exceed the revenues of business
Break-even-when the revenues equal the cost of production
Profit- when revenues exceed cost of production

Question 22

Break-even analysis definition

Answer 22

Business planning tool that applies costs and revenue data to support decision making
Especially important for startups on businesses engaging in new ventures so as to establish the minimum number of products they need to sell to cover all their costs

Question 23

Break-even term

Answer 23

Refers to the level of outputs a firm needs to achieve where total revenue equals total costs and the business starts to make profit

Question 24

Break-even chart

Answer 24

Graphical representation of the costs and revenues associated with producing a good or service. The break-even point can be identified by plotting the total cost and toted revenue figures on a graph

Question 25

What is plotted on a break-even chart

Answer 25

Fixed cost-always straight one, must be paid whether a firm produces anything or not
Total cost-varies as it includes variable cost which varies in direct proportion to output
Sales/revenue- obtained by multiplying selling price by output level /quantity

Question 26

The break -even point (bep)

Answer 26

Is where the toted costs and sales revenue lines cross

Question 27

The break- even quantity

Answer 27

Level of output where a business does not make either a profit or a loss
General Formula
Fixed cost /selling price- average variable cost

Question 28

Break even formula using contribution

Answer 28

Fixed costs/ contribution per unit
Or
Fixed cost/price per unit- variable cost per unit

Question 29

Break-even quantity using total cost= total revenue

Answer 29

Tr = price per unit (p) x quantity (q)
Tc= total fixed cost (tfc)+ total variable cost (tvc)
Tvc = variable cost per unit (vc) x q
Thus
P x q = tfc +tvc

Question 30

Margin of safety

Answer 30

The difference between the actual output or the target level of output a business aims to achieve and the break even quantity or output
Indicates how much sales could fall without the firm falling into loss
Formula
Level of demand - break - even output

Question 31

Target profit output/ quantity

Answer 31

The quantity of sales required to reach the firms target profit
Formula
Fixed costs + target profit/ selling price - average variable cost

Question 32

Target profit

Answer 32

Is the amount of profit that a firm aims to earn within a given time period. The target profit for each level of output can be seen in a break-even chart by comparing the total cost and revenue lines