Breakeven

Question 1

What is the formula for breakeven?

Answer 1

BREAKEVEN = FIXED COSTS / (SELLING PRICE - VARIABLE COSTS)

Question 2

What is breakeven?

Answer 2

• When a business is neither making a profit or a loss, they are covering their costs.

Question 3

What is contribution?

Answer 3

• What a business needs to achieve from selling its products in order to first cover it’s fixed costs and thereafter make a profit.

Question 4

With regards to contribution, what is profit?

Answer 4

• Difference between contribution and fixed costs.

Question 5

How is total contribution calculated?

Answer 5

TOTAL CONTRIBUTION = TOTAL REVENUE - TOTAL VARIABLE COSTS

Question 6

How is contribution per unit calculated?

Answer 6

CONTRIBUTION PER UNIT = SELLING PRICE PER UNIT - VARIABLE COST PER UNIT

Question 7

How is breakeven calculated in terms of contribution?

Answer 7

CONTRIBUTION = FIXED COSTS / CONTRIBUTION PER UNIT

Question 8

Give at least three examples of the uses of breakeven.

Answer 8

At least three from:

1) It helps to decide whether a business idea is profitable and viable.
2) It identifies the level of output and sales needed to generate a profit.
3) It helps to assess the changes in the level of production.
4) It helps to assess the effects of costing and pricing decisions.

Question 9

Give at least two examples of the benefits of breakeven analysis.

Answer 9

At least two from:

• It can be used to analyse the effects of varying customers, prices and costs on a business’s profit.
• It is simple and easy to use.
• The breakeven point is a useful guideline to help businesses make informed decisions.

Question 10

Give at least two examples of the limitations of breakeven analysis.

Answer 10

At least two from:

• It simplifies what can be a complex process - most businesses sell multiple products which makes breakeven more complex.
• Costs are rarely consistent - breakeven analysis presumes that costs stay the same over various levels of output.
• Breakeven focusses on output - it presumes that the business will sell all of its output at the same price.