Break-even analysis

Question 1

Break-even

Answer 1

is the point at which a business is not making a profit or loss, means money being received from sales is the same as the money being spent on costs

Question 2

Types of costs in a break even chart

Answer 2

• variable costs - vary with the level of output e.g. raw materials
• semi-variable costs - part of cost stays the same and part varies in relation to the degree of business activity.
• fixed costs - do not vary with output e.g. output

Question 3

Total cost(formula)

Answer 3

variable costs + fixed costs

Question 4

variable costs per unit(formula)

Answer 4

total variable costs/ quantity in units

Question 5

total variable cost(formula)

Answer 5

quantity in units x variable cost per unit

Question 6

Total revenue/sales revenue(formula)

Answer 6

the total amount of money coming in from sales.
total revenue = quantity sold x selling price per unit

Question 7

Selling price per unit

Answer 7

the amount a customer pays for each unit sold

Question 8

Break-even level of output (units)(formula)

Answer 8

fixed costs/contribution per unit

Question 9

Contribution per unit(formula)

Answer 9

selling price per unit - variable costs per unit

Question 10

Margin of safety (units)
(formula)

Answer 10

the actual number of units sold over and above the break even point.
actual/planned sales in units - break even level of output

Question 11

Break even chart

Answer 11

This plots the costs and sales at each unit of output. Break even point is where the total cost line crosses the total revenue line. Can also be used to calculate margin of safety and profit or loss at different levels of output.

Question 12

Total contribution(formula)

Answer 12

sales revenue - total variable costs

Question 13

Break even point in level of value(formula)

Answer 13

break even in units x selling price per unit

Question 14

Margin of safety (value)(formula)

Answer 14

margin of safety in units x selling price per unit

Question 15

Break even for planning

Answer 15

Sets budgets for amount of sales necessary and costs, forms part of a business plan to show at what point the business will start to make a profit, informs pricing decisions.

Question 16

Break even for monitoring

Answer 16

Monitor progress towards achieving break even point, identify changes to selling price of costs, takes corrective action if target look unlikely.

Question 17

Break even for control

Answer 17

Keeps cost within budget, motivates employees, manage sales accounts

Question 18

Break even for target setting

Answer 18

Set sales targets for individual employees, teams or products, set expenditure budgets, set profit budgets based upon sales targets and cost targets.

Question 19

Advantages of break even

Answer 19

• business knows how many items it must sell in order to break even
• informs decisions on what price to charge
• identifies fixed and variable costs
• can identify if costs are too high allowing the business to look for ways of lowering costs
• can set targets to motivate employees
• easy way to calculate profit or loss at different levels of output.

Question 20

Disadvantages of break even

Answer 20

• does not take into account of variations in costs or selling price
• forecast sales may not be achieved and hence, even though the break even point is know it may not be achieved
• target set may be too high, creating stress

Question 21

profit calculation

Answer 21

total revenue - total costs