Break-Even

Question 1

What is break even ?

How is it calculated?

Answer 1

It is when total costs = total revenue

Break-Even = Fixed costs/CPU

Question 2

What is CPU?

How do you work it out?

Answer 2

Contribution per unit

CPU = S.P.P.U - V.C.P.U

Question 3

What is S.P.P.U ?

What is VCPU?

Answer 3

Selling price per unit

Variable costs per unit

Question 4

What is a break even chart?

Answer 4

A graph showing the revenue and costs for a business at all possible levels of demand or output.

Question 5

What is the margin of safety?

How do you calculate it?

Answer 5

The amount by which demand can fall before the company starts making a loss.

Margin of safety = actual sales - breakeven point

Question 6

What is total contribution?

How do you calculate it?

Answer 6

Difference between the selling actual price of a unit minus the variable costs of the unit.

Total contribution = contribution per unit x quantity sold

Question 7

What should be considered when a business decides on considering a price change?

Answer 7

• potential impact on revenue, profits and break-even of price change
• potential impact on revenue, profits of change in demand and trends
• the effect of a rise or fall in variable costs (eg raw materials)
• the effect of a rise or fall in fixed costs (eg relocating)

Question 8

What happens in an organisation if a price rises?

- how does it effect the break even placement?

Answer 8

A company increases in price can cause a revenue line to rise more steeply. Start at same point but it will go higher higher at max output.
This will therefore, lower the stock needed to reach the breakeven point lowering the actual point

Question 9

What happens in an organisation if there is a rise of decline in demand?

Answer 9

This has no effect on the line of the chart but you have to read the change off by drawing a vertical line.

Question 10

What happens in an organisation if there is a rise in variable costs?

Answer 10

If the variable costs increased so would the total costs therefore the break even point would increase.

Question 11

What happens in an organisation if there is a fall in fixed costs?

Answer 11

If company sales are falling, fixed costs might be lowered to make a break even point feasible.

Question 12

What are the strengths and weaknesses of a breakeven analysis?

Answer 12

\+ simple to understand 
\+ estimate required stock for profits
\+ assess impacts of calculated price changes
\+ whether to purchase stock elsewhere 
- assumes that costs/profits/SPPU stays constant
- estimated
- only a snapshot doesn’t show trends
- it is a simplification

Question 13

What are the methods of working out break-even?

Answer 13

table
graph
formula

Question 14

What is the break even point of a graph?

Answer 14

where the total cost line and total sales lines interest

Question 15

What is included in a break-even graph?

Answer 15

fixed costs
total revenue
total costs
margin of safety
areas of profit and loss

Question 16

What is the margin of safety?

Answer 16

difference between break-even output and actual output

actual output - break even output = margin of safety.

Question 17

Where are the areas of profit and loss in a break-even graph?

Answer 17

profit = between the total costs and total revenue after the break even point
loss = between the total revenue and total costs before the break even point

Question 18

What is % change?

Answer 18

(difference/original) x100

Question 19

What are positives of break-even analysis?

Answer 19

• estimates output level needed to produce and sell objectives
• assess the impact of planned price change
• make decisions whether to seek external help
• shows viability of a programme
• illustrates to owners important of low costs
• calculations are quick and easy

Question 20

What are negatives of break-even analysis?

Answer 20

• Model is a simplification
• assumes the variable costs increase constantly
• assumes all sales are constant in pricing
• assumes all output is sold
• doesn’t take into account sale trends
• most business usually sell more than 1 product
• a planning aid rather than a decision making tool
• it is static

Question 21

What are the axis on the break-even chart?

Answer 21

X - output

Y - price

Question 22

How do you work out the maximum vertical value on break even chart?

Answer 22

Multiply the maximum output by the selling price per unit

Question 23

What line is fixed costs?

Answer 23

A straight horizontal line through the point of y axis that represents the value of fixed costs

Question 24

Why does the total cost line start at the edge of the fixed cost line?

Answer 24

As the line represents that at 0 output there is initial fixed costs
- this changes as the output increases because of variable cost.

Question 25

What would a high safety margin result in?

Answer 25

It is less likely that the business would make a loss

Question 26

What type of company is break-even analysis useful for?

Answer 26

Useful to small and newly established businesses