(PAPER 2) 2.2.3 breakeven

Question 1

breakeven point

Answer 1

total fixed cost + total variable cost = total revenue

total costs = total revenue

Question 2

total revenue £

Answer 2

sales price x quantity

Question 3

total variable cost £

Answer 3

variable cost per unit x quantity

Question 4

variable cost per unit £

Answer 4

total variable cost / quantity

Question 5

total cost £

Answer 5

total variable cost + total fixed cost

Question 6

contribution per unit £

Answer 6

sales price - variable cost per unit

Question 7

breakeven output units

Answer 7

total fixed cost / contribution per unit

Question 8

total contribution £

Answer 8

contribution per unit x quantity
or
total revenue - total variable cost

Question 9

margin of safety units

Answer 9

actual output - breakeven output

Its called a margin of safety because profits aee mafe between those points

Question 10

profit £

Answer 10

total revenue - total cost 
or
total contribution- total fixed costs
or
margin of safety x contribution per unit

Question 11

percentage change

Answer 11

(new-original)
——————– x 100 = % change
original

Question 12

contribution definition

Answer 12

Surplus of revenue left over after variable costs have been paid which is used to pay off fixed costs.

After fc are paid off the surplus becomes profit.

Question 13

unit contribution definition

Answer 13

how much one product is contributing to the fixed costs

Question 14

different types of cost

Answer 14

fixed costs: costs that don’t change with output e.g rent, insurance, salaries…
variable cost: costs that do change with output e.g heating bills, raw materials, fuel…
total cost: fixed cost + variable cost
average unit cost: the cost of unit of output
average variable cost: the variable cost/ unit of production

Question 15

example question

Answer 15

output of tiers (per week) total revenue (£ per week) total costs ( £ per week)
0 0 10000
100 4000 11500
200 8000 13000
300 12000 14500
400 16000 16000!!!!!!!!!!!!!
500 20000 17500
600 24000 19000

until the output of ties hits 400, the business was making a loss.

Q: What is the breakeven point shown in £s?
total revenue=total cost
£16000

Q: What if the business only sells 200 ties a week?
8000-13000= (£5000) loss
Q: What if the business is selling 600 ties a week?
24000-19000= £5000 profit

Q: calculate the selling price of one tie
100:4000 (/100)
1: 40
£40= selling price per unit

Q: calculate the variable cost of one tie
11500-10000=1500- difference between first and second set of total costs per week
variable cost of 100 ties= £1500
100:1500 (/100)
1:15
variable cost of 1 tie= £15

Q: what are the fixed costs?
£10000 (total costs when output of ties at 0)

Q: calculate breakeven output
total fixed costs/ contribution per unit
contribution per unit: sales price - variable cost per unit 
40-15= 25= contribution per unit
100000/25= 400 ties

Question 16

labeling a breakeven chart

Answer 16

£000s
800 ———-
700 –/———–/
600 / / /——–/x——-
500 / / / / ————–
400 /===/====/===/=========================================================
300 ————–
200 —————
100 —————
0 —————-
0 50 100 150 200 250 300 350 400 450 500
output 000 units

===== fixed costs
///////// total costs
——– revenue
x= breakeven point (400)
400= breakeven output
section between revenue and total costs before breakeven point= LOSS
section after breakeven point= PROFIT AND MARGIN OF SAFETY

Question 17

advantages of breakeven analysis

Answer 17

• can do “what if” scenarios e.g. what if the pices ahve increased
• visual aid/ data
• simple to use
• quick to complete
• support bank loan application
• can change variable e.g. no. of customers, to see how if affects
  breakeven output

Baisically reduces the risk of business failure

Question 18

disadvantages of breakeven analysis

Answer 18

• assumes all products are sold
• simplified (single price)
• only as accurate as the data it uses
• only a guideline
• all estimated

Question 19

Calculating selling price of one unit

Answer 19

Income/ output

Question 20

Calculating the variable cost of one unit

Answer 20

Take away the fixed costs from first set of total costs= total variable cost
Total variable cost/output= variable cost of 1 unit

Question 21

Acronym to remember breakeven output:

Fish Can
—————————————
Swim Past Viciouse Crabs

Answer 21

Fixed costs/ selling price - variable costs

Question 22

breakeven definition

Answer 22

a financial planning method that a business uses to calculate how many products it needs to sell in order to cover all its costs