Break-Even

Question 1

What type of COSTS are involved?

Answer 1

• Variable (change with output)
• Semi-Variable
• Fixed (remain the same)
• Total

Question 2

What SALES are involved?

Answer 2

• Total Revenue (income made)
• Total Sales
• Selling price per unit
• Sales in value or units

Question 3

What is the formula for REVENUE.

Answer 3

Revenue = Selling Price x Quantity Sold.

Question 4

What is the formula for PROFIT.

Answer 4

Profit = Total Revenue - Total Costs.

Question 5

What must a business consider when designing a new product?

Answer 5

1) How much it costs to produce one unit of item (variable cost).
2) What price will be chosen for the product (selling price).

Question 6

What is the formula for Break-Even?

Answer 6

B.E = Fixed Costs / (Selling Price - Variable cost).

or

B.E = Fixed Costs / Contribution per unit

Question 7

What is Break-Even and the benefits of using it.

Answer 7

Break-Even shows clearly how many products need to be sold in order for all costs to be covered.

• Finding exact value helps budgeting and helps you purchase the right quantity of supplies from suppliers.
• Helps set goals in the business.

Question 8

What do managers need to asses?

Answer 8

• Is break-even achievable?
• Strategies needed to be put in place.
• If break-even is too high, it indicates product may not be profitable. (vice versa)

Question 9

What are the strengths of Break-Even.

Answer 9

• Allows business to calculate the minimum number of sales they need to achieve.
• Can calculate the level of profit or loss at different levels.
• Can predict outcome of changing variables.
• Provides targets and can set goals.
• Internal part of business plan when seeking finance.
• Aids decision making.

Question 10

What are the weaknesses of Break-Even?

Answer 10

• Based on predicted costs and revenues.
• Fixed costs can vary in reality in the long-term. (seasonal businesses may need overtime in the year so changes in salary may occur).
• Ignores changes in variable costs or selling prices as items are bought or sold in larger quantities.
• Doesn’t ensure actual sales will materialise.

Question 11

Examples of Changing Variables

Answer 11

Fixed Costs:

• landlord putting up rent
• bank charges interest rate
• management want pay rise

Variable Costs:

• raw materials changing price
• minimum wage is increased
• utility companies changing prices

Selling Price:

• new competition enters the market
• positive word of mouth increases demand

Question 12

Changing Variables and the relation to businesses.

Answer 12

Businesses are advised to consider variables that might change and possibly look at a number of scenarios.

Assumption that costs and revenues will be static, not true in reality. (B.E)

Variables can change for better or worse.