Contribution and breakeven

Question 1

How is contribution per unit calculated?

Answer 1

Contribution/unit = selling price/unit - variable costs/unit

Question 2

How can total contribution be calculated?

Answer 2

Total contribution = contribution/unit x number of units
OR
Total revenue - total variable costs

Question 3

Define BREAKEVEN

Answer 3

Breakeven is the point where the business is making neither a profit nor a loss –> total revenue is equal to total costs.

Question 4

Define BREAKEVEN OUTPUT

Answer 4

Breakeven output is the number of units that need to be sold in order to reach the point of breakeven.

Question 5

Define BREAKEVEN ANALYSIS

Answer 5

Breakeven analysis is the study of the relationship between total costs and total revenue in order to identify the level of output the business breaks even.

Question 6

How is breakeven output calculated?

Answer 6

Breakeven output = fixed costs/contribution per unit

Question 7

What are the strengths of breakeven analysis?

Answer 7

• Allows the entrepreneur to predict future profit levels and set goals and targets accordingly
• Calculations are quick and easy to do
• Businesses can look at the worst case scenario

Question 8

What are the weaknesses of breakeven analysis?

Answer 8

• The information may be unreliable
• Assumes that every unit is sold
• Assumptions may change if more is sold

Question 9

What are the different parts of a breakeven chart?

Answer 9

Fixed costs line, variable costs line, total costs line, margin of safety, total revenue line

Question 10

Define MARGIN OF SAFETY

Answer 10

A margin of safety is the difference between the actual output and the breakeven output.

Question 11

How is the margin of safety calculated?

Answer 11

Margin of safety = actual output - breakeven output