5.5 Break even

Question 1

Break-Even Analysis

Answer 1

helpful for collecting specific data to inform a pricing decision or how/why to meet specific costs.

Question 2

What is Break-Even?

Answer 2

The first goal of any profit focused business is to Break-Even.
This is the point where Total Costs= Total Revenue
There is no profit, there is no loss. The total is ZERO.

Question 2

Break Even Formula

Answer 2

Fixed Costs/ (Selling price - variable cost per unit)

Question 3

Contribution per unit

Answer 3

refers to the amount of money a business earns from selling each unit of output.
Contribution per unit = P − AVC (Average Variable Cost)

Question 4

Total contribution

Answer 4

is used to work out profit or loss. It is calculated by multiplying the unit contribution by the quantity sold.

Total contribution= (P − AVC) × Q (Q= Quantity being the amount Amount Sold)

Question 5

Margin of Safety (MoS)

Answer 5

Is the difference between current level of sales (sometimes called level of demand) and the quantity needed to break-even. It shows the extent to which demand exceeds the BEQ.
A useful indication of how much sales could fall without the firm falling into loss.

Question 6

Margin of Safety (MoS)
Formula

Answer 6

Current level of sales - Break-even quantity

Question 7

Target profit

Answer 7

the desired or expected profit from a business, i.e. how much profit it aims to earn. It can be easily determined from a break-even chart by comparing the total cost and total revenue curves at each level of output.

(looking specifically at one product)

Question 7

Target profit formula

Answer 7

TR- TC= Target Profit

Question 8

Target Profit quantity

Answer 8

Fixed cost + Target profit / Price - Variable cost per unit

Question 9

Target Price

Answer 9

he amount charged to customers in order to reach break-even (or any desired target profit).

Question 10

Target Price formula

Answer 10

Average Fixed Cost + Average Variable cost
OR
(Total Fixed Cost / Output) + Average Variable Cost