Break-even

Question 1

What is break-even ? formula

Answer 1

A calculation that informs a business how many units of product they must sell in order to fully cover their costs.
If a business breaks even, they have neither loss or made profit which means they have met equilibrium point

Break-even = fixed costs/contribution per unit

Question 2

What is margin of safety ? formula

Answer 2

The difference between a businesses current sales and break-even point

MOS = actual sales - BEO

Question 3

What is contribution per unit ? benefits and drawbacks

Answer 3

The selling price of unit of goods - variable costs making that unit

Benefits - straightforward to calculate, allows BEO calculation, used to make important decisions and carry out “what-if” analysis

Drawbacks - does not look at fixed costs, assumes consistent price and does not take into account variable costs

Question 4

What information is on a break-even chart ?

Answer 4

1. Total revenue
2. Total costs
3. Fixed costs - remain constant
4. Margin of safety
5. Area of profit/loss
6. Break-even point

DOES NOT INCLUDE
1.Variable costs
2.Selling price

Question 5

Why do businesses use a break-even chart ? advantages and disadvantages

Answer 5

Planning - budget to form business plan
Monitoring - to identify trends/changes in costs
Control - budget, motivates employees to manage sales

Adv - so the business knows how many items to sell, informs pricing decisions, sets targets to motivate employees, identify costs/revenue and when costs are too high

Dis - does not look at variations in costs or selling price, forecast sales may not be achieved which is demotivating, targets set high causing stress and uncertainty