9. Breakeven

Question 1

What is contribution?

Answer 1

The difference between selling and variable cost

Question 2

What is contribution per unit ?

Answer 2

Unit contribution: the sale of one unit
Contribution per unit: selling price - variable cost

Question 3

What does total contribution mean?

Answer 3

More than one unit is sold
Total contribution: total revenue - total variable cost

Question 4

How can contribution be used to calculate profit?

Answer 4

Profit = total contribution- fixed costs

Question 5

What is a breakeven point (intersection)?

Answer 5

The level of output where costs have been covered and that all future sales will generate profit for the business

Question 6

What does a breakeven chart show?

Answer 6

The value of: total cost, total revenue and level of fixed costs over a range of output

Level of output needed to breakeven

Profit at a particular level of output

Relationship between fixed costs and variable costs as profit rises

At levels of output below the breakeven output, losses are made

Question 7

What is the margin of safety?

Answer 7

The amount sales could fall before the breakeven point

Businesses prefer to operate with a large margin of safety, there is a risk that business is more likely to make losses if sales fall

Question 8

What is the margin of safety formula?

Answer 8

Margin of safety = current output - breakeven output

Question 9

What are the advantages of breakeven analysis?

Answer 9

Helps answer what if questions
Can be vital in gaining finance especially in start up stages

Question 10

What are the disadvantages of breakeven analysis

Answer 10

Accuracy of the data: if data is poor and inaccurate, the conclusions drawn may be incorrect resulting in expensive mistakes

Output and stocks: assumes all output is sold so that output = sales and no stocks are overheld

Non linear relationships: assumes that total revenue and total cost lines are linear but that may not be the case