Break-even

Question 1

What is break-even

Answer 1

Break-even is the point at which Total Revenue equals Total Costs so the business is making neither a profit nor a loss, TR=TC

Question 2

Break-even explained

Answer 2

When a business starts up, the owner may invest their money in; equipment, fixtures, fitting or machinery
• At the start of the business there will be little or no revenue, and lots of costs

Question 3

What is contribution?

Answer 3

Contribution is the amount that each unit produced ‘contributes’ towards the fixed costs of the business

Question 4

What does margin of safety show

Answer 4

The margin of safety calculation shows the number of sales that could be lost before the business makes a loss

Question 5

Uses of break-even

Answer 5

Used as a what if? Tool to work out what happens if prices or costs go up

Used by a business that is starting up to work out when they will stop making loses

Used by businesses to make their business plans

Question 6

Limitations of break even

Answer 6

Break even assumes that everything that is made is sold this is not always the case

Break even doesn’t take into account discount sales if customers buy in bulk

The break even calculations are as only as accurate as the data it’s based on