Chapter 4

Question 1

The Break Even point

Answer 1

The break even point is where the revenue of a business is equal to the expenses of the business. At this point the business does not make a profit and does not make a loss.

Question 2

Calculation of the Break Even Point

Answer 2

The break even point is calculated by using the following formula:

                        fixed expenses  \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_ selling price per unit - variable expenses per unit

The selling price per unit less the variable expense per unit is the contribution margin per unit.

Question 3

Calculation of the Break Even Sales in Dollars

Answer 3

The break even sales in dollars formula is:

Selling price per unit x Break even point in units

Question 4

Sales Volume required to meet a Profit Target

Answer 4

The number of products that must be sold to make a profit target can be found by using the following formula:

                Fixed Expenses + Profit Target \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_
 Selling Price per unit - Variable Expenses per unit

Question 5

Break Even Analysis for Multiple Products

Answer 5

Most businesses sell more than one product.

Question 6

Changes in the Sales Mix (Product Mix)

Answer 6

Cost volume profit analysis can be used to evaluate how the break even point and profit are likely to change as a result of changes in the sales mix of a business.

Question 7

Limitations of Break Even Analysis

Answer 7

• Fixed expenses are fixed for only a limited period of
  time. In the long term all expenses will increase.
• The variable expenses per unit may decrease as a
  manufacturing business expands due to economies
  of scale
• A business may be able to obtain a discount for the
  bulk purchase of inventory, thereby reducing this
  variable expense per unit.

Question 8

The Margin of Safety

Answer 8

The margin of safety is the dollar amount of actual or expected sales above the break even point.

The margin of safety formula is:
Total sales in dollars (actual or expected) - Break
even sales.
The margin of safety shows how far sales can fall before a business starts to make a loss. A business will want the margin of safety to be as high as possible.