Finance- Break Even Analysis

Question 1

What is break-even analysis?

Answer 1

Break even analysis is a method for determining the level of sales at which a company will have no profit or loss

Question 2

What is the margin of safety?

Answer 2

The difference between the forecasted output and break-even output.

Question 3

What is the break even formula?

Answer 3

Fixed Costs / Contribution per Unit

Question 4

How do you work out Contribution per Unit?

Answer 4

Selling Price (per unit) - Variable Cost (per unit)

Question 5

Define variable costs.

Answer 5

The costs that vary directly with the level of output.

Question 6

What are examples of variable costs?

Answer 6

Raw materials
Direct labour
Fuel
Revenue-related costs such as commission

Question 7

What are the advantages of break even analysis?

Answer 7

Identifies how long it will take to reach profitability
Helps to understand the viability of a business proposition
Helps to determine the Margin of Safety
Illustrates the importance of controlling costs and selling the correct selling price

Question 8

What are the disadvantages of break even analysis?

Answer 8

Unrealistic assumptions- price and cost can change
Most businesses sell more than one product so becomes harder to calculate
Should be a planning aid rather than a decision making tool.

Question 9

Define fixed costs

Answer 9

Fixed costs are those business costs that are not directly related to the level of production or output

Question 10

What are examples of fixed costs

Answer 10

Rent and rates
Research and development
Marketing costs (non-revenue related)