13. Breakeven Analysis

Question 1

What is the equation for the number of units needed to be sold to breakeven?

Answer 1

(Fixed Costs) / (Contribution Per unit)

Question 2

What is the equation for revenue needed to breakeven?

Answer 2

(Fixed Costs) / (C/S Ratio)

Question 3

What is the margin of satefy?

Answer 3

The percentage by which forecast revenue exceeds or falls short of that required to break even

Question 4

What is the equation for margin of safety (units)?

Answer 4

Budgeted sales units - Breakeven sales units

Question 5

What is the equation for margin of safety (percentage)?

Answer 5

(Budgeted sales units - Breakeven sales units)/ Budgeted sales units

Question 6

What is the equation for the number of units needed to reach target profit?

Answer 6

(Fixed Costs + Profit)/ Contribution per unit

Question 7

What are the 4 assumptions made (limitations) in breakeven analysis?

Answer 7

1. Constant fixed costs at any output level
2. Constant variable cost and sales price per unit
3. No change in inventory levels
4. Only for single products

Question 8

What are the 2 assumptions made in multi-product breakeven analysis?

Answer 8

1. Constant product mix

2. All products with identical C/S ratio

Question 9

What is the equation for the number of units needed to be sold to breakeven in multi product analysis?

Answer 9

(Fixed Costs) / (Contribution Per Mix Bag)

Question 10

What is the equation for revenue needed to breakeven in multi product analysis?

Answer 10

(Fixed Costs) / (C/S Ratio per standard mix)

Question 11

What are the 3 steps in working out breakeven units in a multi product scenario?

Answer 11

1. Calculate contribution per standard bag
2. Use breakeven formula to calculate no. of bags
3. Work out how many of each individual product will be sold at this mix

OR

1. Calculate the c/s ratio for each bag
2. Use the breakeven revenue formula
3. Divide into the standard mix ratio

Question 12

What is the only difference between a multiproduct breakeven chart and a normal one?

Answer 12

X axis shows number of mix bags, not number of units

Question 13

In a multi-product profit volume chart, which product will have the highest gradient line?

Answer 13

That with the highest C/S ratio

Question 14

What is operational gearing?

Answer 14

The proportion of costs that are fixed - higher when fixed costs are higher

Question 15

What are the consequences of high operational gearing?

Answer 15

1. High breakeven point
2. Profitability very elastic in terms of sales
3. Steeper profit lines on the P/V chart