Break-even

Question 1

How to calculate the BEP

Answer 1

BEP = Fixed costs / Contribution per unit

Question 2

How to calculate contribution per unit

Answer 2

CPU = Selling price - VC per unit

Question 3

How to calculate total contribution

Answer 3

Total contribution = Total output x CPU

Question 4

Uses of BE analysis

Answer 4

• Decide whether a business idea is profitable/ viable
• Identify the level of output needs to generate a profit
• Assess the changes in level of production
• Assess the effects of costing and pricing decisions

Question 5

What happens to the BEP if there is a raising of price ?

Answer 5

An increased price will increase the revenue at each level of output, lowers the BEP

Question 6

What happens to the BEP if there are lower VC ?

Answer 6

A reduction in VC will move the Total cost line down and lower the BEP

Question 7

What happens to the BEP if there is an increase in FC ?

Answer 7

An increase in FC will raise the FC line, increasing the total costs and the BEP will rise.

Question 8

How to calculate the Margin of safety ?

Answer 8

Margin of safety = Current level of output - BEP

Question 9

Benefits of the Break even analysis

Answer 9

+ Simple and easy to use
+ The BEP is a useful guideline to help businesses make decisions
+ Used to help analyse the impact of varying customer prices & costs on a businesses profit

Question 10

Limitations of the Break even analysis

Answer 10

• Costs are rarely constant, BEA assumes the costs stay the same
• BE focuses on output, presumes that all outputs are sold at the same price.