2.2.3 - Breakeven

Question 1

What is breakeven?

Answer 1

When total revenue is equal to total costs

Question 2

Contribution formula

Answer 2

Selling price - variable costs

Question 3

Break even formula

Answer 3

Fixed costs / contribution

Question 4

What is the margin of safety?

Answer 4

Difference between actual level of sales and break-even point

Question 5

Margin of Safety formula

Answer 5

Actual sales - break-even point

Question 6

Advantages of break even

Answer 6

• Allows a business to plan how many products need to be sold to make a profit
• Can be used to make judgements on prices and costs
• Can support applications for loans

Question 7

Disadvantages of breakeven

Answer 7

• Assumes the firm sell all products at a single price
• Assumes costs increase constantly and doesn’t take into account bulk buying