2.2.3 - BREAK EVEN

Question 1

What is Break Even?

Answer 1

The POINT at which TOTAL REVENUE EQUALS TOTAL COSTS so the business is making NEITHER a PROFIT nor a LOSS

TR = TC

Question 2

What is Contribution?

Answer 2

The AMOUNT that EACH UNIT PRODUCED TOWARDS the FIXED COSTS of the business

Question 3

What is the Formula for Contribution?

Answer 3

C = Selling Price - Variable Costs

Question 4

What is the Formula for BREAK EVEN?

Answer 4

BE = Total Fixed Cost / (Price Per Unit - VC Per Unit )

fixed cost/ contribution

Question 5

What does the Margin of Safety show?

Answer 5

DIFFERENCE between the ACTUAL of OUTPUT & the BREAKEVEN OUTPUT

POSITVE Value = PROFITBLE
NEGATIVE Value = LOSS

Question 6

What is the Formula for Margin of Safety?

Answer 6

Actual sales - BE Level of sales

Question 7

What are 3 Uses of Break Even Analysis?

Answer 7

• useful for STOCK CONTROL
• used to write their BUSINESS PLAN
• used as a WHAT IF, contingency planning

Question 8

What are 1 Limitations of Break Even?

Answer 8

• only as reliable as the data you have, you can’t predict the future