Unit 3 - Break-Even & Income Statement

Question 1

What is break-even?

Answer 1

Break-even is when a business is making neither a profit nor a loss.

Question 2

What is the break-even point?

Answer 2

The point at which a company has sold enough products or services to have covered all their costs.

Question 3

List four examples of business costs

Answer 3

• Cost of raw materials
• Cost of salaries
• Cost of energy
• Cost of advertising

Question 4

What are fixed costs?

Answer 4

Costs which stay the same no matter how many units are produced, e.g. rent.

Question 5

What are variable costs?

Answer 5

Costs which change depending on the level of output, e.g. electricity used in production.

Question 6

What are total costs?

Answer 6

Total costs are the fixed and variable costs added together.

Question 7

How is contribution calculated?

Answer 7

Contribution = selling price - variable cost

Question 8

What does the break-even chart show?

Answer 8

The break-even point can be identified as the point where the sales revenue and total costs meet.

Question 9

How is total profit or loss calculated?

Answer 9

Total profit or loss = sales revenue - total costs

Question 10

How is selling price calculated?

Answer 10

Selling price = sales revenue ÷ output

Question 11

What is the formula for break-even point?

Answer 11

Break-even point = fixed costs ÷ (sales - variable costs)

Question 12

How is variable cost per unit calculated?

Answer 12

Variable cost per unit = (total cost - fixed costs) ÷ sales revenue

Question 13

What happens if a business produces less than the break-even point?

Answer 13

The business will make a loss.

Question 14

What happens if a business produces more than the break-even point?

Answer 14

The business will make a profit.

Question 15

Why is calculating the break-even point important for a business?

Answer 15

It helps determine how many units need to be produced before making a profit.

Question 16

What does an income statement show?

Answer 16

An income statement shows the income, expenditure, and profit/loss made by a business throughout the year.

Question 17

What is sales revenue?

Answer 17

Sales revenue is the income a business receives throughout the year by selling to customers.

Question 18

What is the cost of sales?

Answer 18

The cost of producing a product or buying a product to sell to customers.

Question 19

What is gross profit?

Answer 19

The profit made from buying and selling goods.

Question 20

What are expenses?

Answer 20

Items that a business must pay for to keep running, e.g. electricity, wages, loan repayments.

Question 21

What is profit/loss for the year?

Answer 21

The profit made once expenses have been subtracted. A loss is shown in brackets, e.g., (5,000).

Question 22

List three reasons why a company would produce an income statement.

Answer 22

• To calculate total costs of expenses
  -To calculate the profit/loss made for the year
  -For legal reasons (required by law for limited companies).
• Calculate tax necessary for payment
• Calculate cost of sales

Question 23

Why is tax a reason to produce an income statement?

Answer 23

Profit needs to be calculated so businesses can accurately calculate their tax payments.

Question 24

How can an income statement help with comparisons?

Answer 24

It allows businesses to compare with previous years or other companies.

Question 25

What does the trading account section of an income statement show?

Answer 25

Sales/income/revenue - cost of sales = Gross profit

Question 26

What does the profit and loss account section of an income statement show?

Answer 26

Net profit = Gross profit - expenses (fixed costs)