Finance - Break Even Point , Margin of Safety

Question 1

• What is the break-even point?
• Why is it important?

Answer 1

• When total revenue = total costs
• Can be used by managers to identify the number of items they must sell to ensure they will meet the break even point.

Question 2

What is the Margin of Safety?

Answer 2

Amount sales can fall before the break even point

Question 3

What are fixed costs?
Give 2 examples

Answer 3

Expenses the business incurs which don’t change with output

• Rent
• Advertising
• Rates
• Salaries

Question 4

• What are variable costs?
  Give 2 examples
• What is the formula?

Answer 4

Expenses that change dependng of the level of output
More business produces = higher variable costs

• Raw materials
• Electricity bills

FORMULA - Cost per Unit x Number of Unit