Breakeven Analysis

Question 1

COSTS

Answer 1

FIXED, VARIABLE, SEMI-VARIABLE, TOTAL COSTS

Question 2

FIXED COSTS (FC)

Answer 2

They don’t change with the level of output/production (rent, salaries)

Question 3

VARIABLE COSTS (VC)

Answer 3

Linked directly to production of goods (cost of sales/cost of materials)
(ingredients, packaging, materials)

Question 4

SEMI-VARIABLE COSTS (SMV)

Answer 4

FC and VC parts: gas, electricity phone, water
FC part: standing charge, pay to stay connected to the supply
VC part: is the plus usage

Question 5

TOTAL COSTS (TC)

Answer 5

fixed costs+variable costs+semi variable costs

TC=FC+VC

Question 6

BREAKEVEN GRAPH KEY POINTS

Answer 6

• breakeven point is always in units
• total revenue (sales starts always from 0)
• total cost (TC=FC+VC) always starts from fixed costs line
• fixed costs never changes always horizontal
• profit=after the BEP
• loss=below the BEP
• margin of safety=difference between the current level of output and the breakeven level of output

Question 7

FORMULA FOR BREAKEVEN POINT IN UNITS

Answer 7

SELLING PRICE (PER UNIT) - VARIABLE COST (PER UNIT)
=
number of units to sell to cover all costs

   FC -------------------  contribution = how much each unit contributes to paying FC (sp-vc)

Question 8

FORMULA FOR BREAKEVEN (SALES VALUE)

Answer 8

breakeven point x selling price

Question 9

CONTRIBUTION PER UNIT FORMULA

Answer 9

selling price-variable cost per unit

Question 10

TOTAL CONTRIBUTION FORMULA (2)

Answer 10

1) total revenue - total variable costs

2) contribution per unit x number of units sold

Question 11

PROFIT FORMULA (4)

Answer 11

1) total revenue - total costs
2) contribution per unit x margin of safety
3) total contribution - fixed costs
4) (mos x sp) - (mos x vc)

Question 12

TOTAL REVENUE FORMULA

Answer 12

selling price x quantity sold

Question 13

TOTAL COSTS FORMULA

Answer 13

total fixed costs + total variable costs

Question 14

MARGIN OF SAFETY UNITS FORMULA

Answer 14

sales - breakeven level of output

Question 15

MARGIN OF SAFETY VALUE FORMULA

Answer 15

margin of safety (units) x selling price per unit

Question 16

CONTRIBUTION ADVANTAGES AND DISADVANTAGES

Answer 16

Advantages:
1) A business is able to see whether the products it produces actually cover their own variable costs
2) This is used to set the price of the product in relation to direct production costs
Disadvantages:
1) Contribution per unit may be very low, so the business will need to sell a large number to cover the fixed costs
2) Contribution per unit on certain products may be extremely high
3) In each case the contribution per unit is distorted and may not be valuable

Question 17

WHY DO BREAKEVEN ANALYSIS?

Answer 17

1) Planning
2) Monitoring
3) Control
4) Target Setting

Question 18

BREAK EVEN ANALYSIS ADVANTAGES AND DISADVANTAGES

Answer 18

Advantages:
1) Can set targets that motivates employees
2) Identifies fixed and variable costs
3) Easy way to calculate profit or loss at any level of output
4) Can identify if costs are too high allowing the business to look for ways of lowering costs
Disadvantages:
1) Does not take account of variations in costs or selling price
2) Target sets may be too high creating stress
3) Sales may not be achieved, even though the break even point is known it may not be achieved

Question 19

WHY IS FOCUSING ON CONTRIBUTION IMPORTANT?

Answer 19

1) Calculates the amount each product contributes towards paying total fixed costs
2) Can help set prices to optimise the contribution (profit of each)
3) Focusing on maximising contribution helps to ensure better liquidity
4) Can help reduce variable cost
5) May lead to negotiation with existing supplier on a better price
6) Could mean switching supplier to a cheaper alternative