Everything to do with Break Even!

Question 1

How to work out Break even?

Answer 1

BE (units) = Fixed costs/ contribution

Question 2

How to work out contribution?

Answer 2

Contribution = Selling price - variable costs

Question 3

What are the different lines that need to be on the graph?

Answer 3

Fixed costs (straight line)

Variable costs ( found by x units by variable cost per unit- do this for different amounts of units, this line must start from 0)

Total costs (FC + variable costs, plot these numbers on the graph then draw the line)

Total revenue- found by multiplying price by units sold- find this point on the graph, then draw a staright line from this point to 0)

Question 4

What must you not forget to draw on a Break even graph?

Answer 4

The break even point, which is where Total revenue crosses total costs.

Question 5

What are the axis on a break even chart?

Answer 5

Y axis = costs/revenues

X axis = units

Question 6

How may break-even analysis help an entrepreneur make decisions about the start-up of a new business?

Answer 6

• Enable the entrepreneur to see the level of output needed to make a profit. Can help the entrepreneur to see if the business is financially viable.
• To assist the production of a business plan. This may be crucial in gaining financial support from organisations such as banks or potential shareholders and investors.
• To facilitate the use of ‘what if?’ analysis to show different break-even outputs arising from different costs and prices.
• Break-even analysis may prevent an expensive mistake for the entrepreneur by showing him or her that the business is unlikely to succeed.