3.5.2 Analysing financial objectives

Question 1

Break even

Answer 1

-When a business has sold enough products to be able to cover all its costs, it has reached break even point
-There is no profit or loss made at break even point

Question 2

Break even formula

Answer 2

Fixed costs (£)/selling price per unit - variable cost per unit

Answer is in units!!! (whole number)

Question 3

Contribution

Answer 3

Amount of money available form the sale of each item to go towards covering all fixed costs

Question 4

Contribution formula

Answer 4

selling price per unit- variable cost per unit

Question 5

Margin of safety

Answer 5

The difference between actual output and the break even output

Question 6

Margin of safety formula

Answer 6

Actual output-break even

Question 7

Strengths of calculating break even

Answer 7

-Business knows the minimum amount of sales
-Increases motivation to hit the target
-Calculations are quick+easy
-The importance of keeping fixed costs down to a minimum
-Helps management+finance (provides better understand the viability and risk of a business/business idea)

Question 8

Limitations of calculating break even

Answer 8

-Assumptions aren’t always correct
-Don’t take external factors into consideration
-A planning aid, rather than a decision making tool
-Sales are unlikely to be the same as output