3.3 Break even

Question 1

Break even?

Answer 1

The level of output at which total costs equal total revenue

Question 2

The formula for Break-Even?

Answer 2

Fixed cots/contribution per unit (price -VC)

Question 3

What is the equation for total contribution?

Answer 3

Total revenue – Total variable cost

Question 4

What is the equation for contribution per unit?

Answer 4

Price per unit – Variable cost per unit

Question 5

Where is the break-even point on a break-even chart?

Answer 5

The intersection of Total Cost and Total Revenue
by calculation: BE quantity (units) * price

Question 6

How do we get the Total revenue?

Answer 6

Price x output

Question 7

What does the margin of safety show?

Answer 7

Shows how much demand exceeds or fails to exceed BEQ

Question 8

What is the equation for margin of safety?

Answer 8

Sales volume (Current or Projected Demand/sales/output) – BEQ

Question 9

Title of break even chart

Answer 9

Break Even Analysis for Company XYZ

Question 10

Label axes

Answer 10

X-axis is output
Y-axis is Revenue/Cost (label currency as well)

Question 11

Draw Total Revenue line

Answer 11

Starts at (0,0), intersects BEP

Question 12

Draw Total Cost line

Answer 12

Starts at Fixed Costs and takes the slope of VCs, intersects the BEP

Question 13

How do we calculate the BR revenue?

Answer 13

BEQ * price

Question 14

Limitations of BE

Answer 14

Makes several assumptions:

Fixed costs must be paid regardless of the output

Variable cost increases linearly

Ignores economies of scale

Sales revenue increases linearly

Ignores discounts for large orders and price discrimination

Assumes only one product is sold

Every unit of output is sold

The selling price is constant regardless of units sold

Provides a static model (e.g. in real life production costs can change)

Depends on reliability of data

Other factors can have an effect (e.g. competitors, staff motivation)

Less suitable for multi-product lines

Question 15

What does the break even help to find?

Answer 15

Helps to tell whether a good can be financially worthwhile and the level of profit a business is likely to earn

Question 16

What does the BE ignore when calculating level of sales needed to attain a certain profit?

Answer 16

Ignores other factors that affect profit:

Different pricing throughout time
Level of demand is subject to change
Profit depends on risk
Innovation and luck – prediction aren’t always followed

Question 17

What does the BE have to consider when calculating level of sales needed to attain a certain profit?

Answer 17

Pricing strategies (penetration pricing, market skimming, etc.)

Price elasticity

Question 18

What is the formula to calculate the (target) output with given price and profit?

Answer 18

output= (Fixed costs+profit)/contribution per unit

Question 19

What is the formula to calculate (target) profit with given (target) output and contribution per unit?

Answer 19

output= (Fixed costs+profit)/contribution per unit

Farther:
FC+profit=CPUoutput
Profit=CPUoutput-FC

Question 20

What is the formula to calculate the (target) price with given output and profit?

Answer 20

(Fixed costs+profit)/Price - VC=output

or
Farther:

price=(FC+profit+output*VC)/output

Question 21

Can a company have a negative margin of safety?

Answer 21

yes, if the current output is below the BEQ

Question 22

Can we express the margin of safety by %?

Answer 22

Yes, the difference between the current and BEQ/sales

Question 23

What do we have to necessarily indicate on the chart?

Answer 23

1. The lines of TC, TR,
2. the BE point itself! point by the arrow!
3. the numbers on both axes must be sufficient to be scalable (take the BEQ and BER first on both axis, take more or less in the center; measure logically where would be the FC line or any other given data and write some additional numbers based on logic, like 30, 40, 50 on the x axis)

Question 24

How will the change in price affect BEQ?

Answer 24

With higher price:
less quantity is needed to break even.
TR line becomes steeper
Margin of safety increases
With lower price - the reverse happens

Question 25

How will the change in costs affect BEQ?

Answer 25

In the case of changes in FCs:
the starting point of TC shifts up (the slope remains the same)
and BEP shifts up and right, increasing the need of more output and revenue to brek-even

In the case of VC:
the starting point of the TC remains the same but
The slope becomes steeper and touches the TR in the upper and more right area, increasing the BEQ and BER

In both cases more output is needed to break even and in both cases the margin of safety is reduced