break even

Question 1

what is break even?

Answer 1

number of units a business needs to sell so the revenue matched the costs

Question 2

how do you calculate break even?

Answer 2

fixed costs/ contribution per unit

Question 3

how do you calculate contribution per unit?

Answer 3

selling price - variable cost per unit

Question 4

how is break even used in the business plan?

Answer 4

used as a decision making tool- if break even is higher than predicted sales they can take action

Question 5

LOA- benefit of break even

Answer 5

• by calculating break their break even point
• a business can identify the number of units they need to sell in order to cover their costs
• they can compare this with sales forecasts
• and identify whether they are likely to make a loss
• they can therefore take action to reduce their break even point
• e.g switching to a cheaper supplier or increasing their selling price
• in order to increase their contribution per unit
• and prevent losses from occurring

Question 6

LOA- drawback of break even

Answer 6

• break even assumes prices and costs remain constant
• for example inflation may significantly increase prices of raw materials
• decreasing contribution per unit
• break even ignores this so may become inaccurate
• inappropriate decisions
• for example prices too low cashing the business to make a loss on each item sold
• operating loss