Breakeven- pages 43-47

Question 1

Breakeven

Answer 1

This is when revenue from sales and costs are the same

Question 2

Breakeven point

Answer 2

The breakeven point is the number of units an enterprise will need to produce and sell in order to cover its costs.
One unit fewer means the enterprise will make a loss bot one unit more mean it will make a profit

Question 3

What information does a breakeven chart provide?

Answer 3

A breakeven chart provides lots of financial information about a product and can be used to identify the margin of safety

Question 4

Margin of safety

Answer 4

The total number of sales that can be lost before the enterprise loses money

Question 5

Why is it important for an enterprise to set a margin of safety?

Answer 5

As it shows how far sales could fall before they would affect the enterprise’s ability to cover its costs.

Question 6

What can a small margin of safety mean?

Answer 6

It could be risky as it would have the enterprise open to financial difficulties, because if sales fell its total revenue would fall.

Question 7

What happens if costs increase?

Answer 7

The break-even point rises, the enterprise makes less profit. Therefore the enterprise may need to sell more items to break-even or try to reduce costs or may raise the selling price

Question 8

What does it mean if costs fall?

Answer 8

It lowers the break-even point, the enterprise makes more profit. The lower the break-even, the fewer sales are required to break-even

Question 9

What happens if selling price decreases?

Answer 9

The break-even point rises. Therefore the enterprise will need to make more sales to break even or reduce its variable costs

Question 10

What does it mean if there is an increase in selling price?

Answer 10

Break-even point lowers, fewer sales are required to break-even

Question 11

What happens if sales revenue fall?

Answer 11

The break-even point rises, the margin of safety decrease. Therefore the enterprise may try to improve sales by lowering selling price

Question 12

What does it mean if sales revenue increases?

Answer 12

It lowers break-even point. The margin of safety increases revenue and the enterprise makes more profit

Question 13

Limitations (problems) of break-even

Answer 13

• Assumes all stock is sold
• Assumes costs remain the same
• Assumes a business only sells one product

Question 14

Benefits of break-even analysis

Answer 14

• Fixed and variable costs are known
• Potential sales revenue can be calculated
• The margin of safety is known
• The best price can be set for the product

Question 15

Risks of not using break-even analysis

Answer 15

• Setting of price may be not correct, resulting in too high or too low prices
• The enterprise will not know how many items need to be sold in order to make a profit
• Margin of safety not known