5 Break-even Analysis 38

Question 1

What is required to calculate the Break-even point for a product?

Answer 1

It requires the knowledge of:
º The selling price of the product
º Its fixed cost
º Its variable cost per unit

Question 2

What is the formula to calculate the Break-even output level ?

Answer 2

Break-even output = Fixed costs / (selling price per unit – variable cost per unit )

Question 3

TO SEE THE CHARTS OF BREAK - EVEN POINT PG 236

Answer 3

PG 236

Question 4

Break-even chart….

Answer 4

# A limitation of the break-even chart is that its a static model.
# It doesn't show sales trend over time.
# But it can be a useful method for showing when changes are planned e.g: when a business is considering a prince increase

Question 5

What are the strengths of break-even analysis ?

Answer 5

The strengths are :
+ It can estimate the future level of output they will need to produce and sell in order to meet given profit objectives

+ simple and visual

+ Take decision about whether to produce their ow products or components or whether to buy from external sources

Question 6

What are the weaknesses of break-even analysis ?

Answer 6

• Ignores the benefits of bulk buying. Total cost line will no longer be straight if firm negotiates lower prices for purchasing larger quantities.
• It assumes that price per unit is constant but this often varies for many firms
• Assumes that all the output is sold. Times of low demand it may be difficult selling all that is being produced by a firm

Question 7

Contribution…

Answer 7

Contribution looks at the profit made on individual products

It is used in calculating how many items need to be sold to cover all the business total costs

Contribution is the difference between sales and variable costs of production

Question 8

What is the formula for Contribution?

Answer 8

Contribution = total sales - total variable costs

Question 9

What are the main changes to consider of a break-even chart ?

Answer 9

1. The impact on revenue, profits and break even of a change in price
2. The impact on revenue and profits of a change in demand (product has become more or less fashionable)
3. The effect of a rise or fall in variable costs (raw material)
4. The effect of a rise or fall in fixed costs (smaller office)

Question 10

What is the margin of safety ?

The Formula:

Answer 10

The amount by which demand can fall before the firm starts making losses
Margin of safety = Sales - Break-even point

Question 11

How can the break-even change and what are the effects ?

Answer 11

1. Price rise: Revenue line rise more steeply and lower break-even point
2. A rise or fall in demand: No effect on the lines
3. Rise in variable costs: Variable cost line and the total cost line rise more steeply
4. Fall in fixed costs: If sales are going down may be necessary to cut fixed costs to break-even