breakeven

Question 1

what is breakeven and it’s importance

Answer 1

breakeven is the point at which the business is making neither a profit or a loss
-it is of relative importance within new businesses that want to cover their initial investments- when the objective is survival when trying to penetrate competitive markets

Question 2

what are fixed costs

Answer 2

-costs that have to be paid on a weekly or monthly basis regardless of level of output i.e
-remain static and unchanged despite level of output change
-for example: rent on premises, salaries, insurance
-fixed costs need to be covered by revenue

Question 3

what are variable costs (per unit)

Answer 3

-the cost of production each item
-for example: wages, delivery cost, raw materials, energy bills.
-increasing level of output increases the variable cost
-variable costs rise and fall with the level of output

Question 4

what is contribution

Answer 4

-selling price - VC per unit
-how much of the sale is going to contribute to covering the fixed costs of production

Question 5

what is the breakeven formula

Answer 5

fixed costs / contribution per unit

Question 6

profit calc

Answer 6

profit = total contribution - fixed costs
profit = revenue - fixed costs

Question 7

what is total contribution

Answer 7

contribution per unit x quantity

Question 8

what are the uses of breakeven

Answer 8

-used as a what if tool to work out what will happen if prices go up, effecting costs and where breakeven will be
-used by business that are starting up to see when they will start making a profit
-used within a business plan- acquiring external finance
-calculating margin of safety is useful to compare against actual figures and breakeven

Question 9

limitations of breakeven

Answer 9

-can be easily miscalculated which means ur can therefore be unreliable
-becomes increasingly complex if the business sells more than one product at a range of prices- time consuming, opportunity cost
-doesn’t take into account product bought in bulk
-only as accurate as the info implemented

Question 10

revenue

Answer 10

quantity x selling price

Question 11

what is the margin of safety

Answer 11

-how many products you are actually selling above the breakeven output
-they amount of sales they could afford to lose without making a loss