Break Even

Question 1

What is break even

Answer 1

the point where the business makes neither profit nor loss, money received and money spent is equal

Question 2

How is break even calculated?

Answer 2

fixed costs / contribution per unit

Question 3

How is contribution per unit calculated?

Answer 3

selling price - variable costs per unit

Question 4

How is total consumption calculated

Answer 4

sales revenue - total variable costs

Question 5

How is total variable costs calculated?

Answer 5

variable costs per unit X quantity

Question 6

What is margin of safety?

Answer 6

The actual number of units sold over and above the break even point

Question 7

How is margin of safety calculated?

Answer 7

actual sales in units - break even level of output

Question 8

On a chart, what does the fixed cost line look like?

Answer 8

A horizontal straight line at the fixed cost on the y axis

Question 9

On a chart, what does the variable cost line look like?

Answer 9

Always starts at 0, as output increases the variable costs will increase, slopes upwards from 0

Question 10

On a chart, what does the total costs line look like?

Answer 10

Starts at the fixed cost point, slopes upward, should be parallel to the variable cost line

Question 11

On a chart, what does the total revenue line look like?

Answer 11

Starts at 0, slopes upwards as sales increase

Question 12

How do you identify the break even point on a chart?

Answer 12

The crossover of the total revenue line and the total cost line

Question 13

What is contribution per unit

Answer 13

the amount of profit the business generates per unit of product it sells

Question 14

What are the benefits of contribution per unit

Answer 14

Straightforward to calculate, can be used to inform decisions, can be used to carry out what-if analysis

Question 15

What are the limitations of contribution per unit

Answer 15

Does not take fixed costs into account, Assumes all prices stay constant

Question 16

How can break even be used for planning

Answer 16

sets budgets for the sales necessary and for costs, forms a plan to start profit-making, and informs pricing decisions

Question 17

How can break even be used for monitoring?

Answer 17

Monitor progress towards achieving break even point, identify changes to selling price of goods, take corrective action if targets look unlikely to be met

Question 18

How can break even be used for control?

Answer 18

keeps costs within budget, motivate employees, and manage sake accounts

Question 19

How can break even be used for target setting?

Answer 19

sets sale targets for individual employees, sets expenditure budgets, set profit budgets

Question 20

What are the benefits of break even

Answer 20

Business knows how many items it must sell to reach break even, sets targets which motivates employees, identifies fixed and variable costs

Question 21

What are the limitations of break even

Answer 21

Does not take into account variations in costs or selling prices, forecasts may not be achieved, and targets may be set to high (creates stress)