5 - Break Even

Question 1

What Is Break Even?
(3 Points)

Answer 1

~ Point at which the business is not making a profit or a loss.

~ The business is only covering its costs.

~ TR = TC.

Question 2

What Is Break Even Output?
(2 Points)

Answer 2

~ Level of sales a business needs to make, to cover its costs.

~ Contribution = Fixed Costs.

Question 3

When Sales Are Below The Break-Even Output, What Happens?
(2 Points)

Answer 3

~ Costs > Revenue.

~ Business is making a loss.

Question 4

When Sales Are Above The Break-Even Output, What Happens?
(2 Points)

Answer 4

~ Revenue > Costs.

~ Business is making a profit.

Question 5

What Is Contribution Per Unit?

Answer 5

Difference between selling price per unit and variable cost per unit.

Question 6

How Do You Calculate Contribution Per Unit?

Answer 6

Selling Price Per Unit - Variable Cost Per Unit

Question 7

What Is Total Contribution?

Answer 7

Difference between total sales revenue and total variable costs.

Question 8

How Do You Calculate Total Contribution?
(2 Points)

Answer 8

~ Total Revenue - Total Variable Costs

Or

~ Contribution Per Unit x No. Of Units Sold

Question 9

How Do You Calculate Break Even Output?
(2 Points)

Answer 9

~ Fixed Cost / Contribution Per Unit

Or

~ TR = TC.

Question 10

What Is Margin Of Safety?
(2 Points)

Answer 10

~ How much actual output is above the break-even level of output.

~ Bigger margin of safety, means less risk.

Question 11

How Do You Calculate Margin Of Safety?

Answer 11

Actual Output - Break Even Output

Question 12

What Do Break-Even Charts Show?

Answer 12

How costs and revenue vary at different outputs.

Question 13

How Do You Construct A Break Even Chart?
(4 Points)

Answer 13

~ Fixed cost curve is horizontal, as it doesn’t change with output.

~ Variable costs is upward sloping, as it changes with output.

~ Total costs is upward sloping, as it is FC + VC.

~ Total revenue is upward sloping, as it increases with the number of units sold.

Question 14

How Is Revenue Calculated?

Answer 14

Selling Price x No. Units Sold

Question 15

What Would A Break Even Chart Look Like For This Example & Explain It
(2 Points)

~ Actual Output = 2500 units

~ Fixed Costs = £3000

~ Variable Cost Per Unit = £1

~ Sales Price = £3

Answer 15

~ Break Even Output = 1500 units

~ Margin Of Safety = 1000 units

Question 16

What Variables Could Change On Break Even Charts?
(3 Points)

Answer 16

~ Fixed costs.

~ Variable costs.

~ Selling price.

Question 17

What Effect Would A Fall In Fixed Costs Have On This Break Even Chart
(4 Points)

~ Actual Output = 2500 units

~ Fixed Costs = £3000

~ Variable Cost Per Unit = £1

~ Sales Price = £3

Answer 17

~ Fixed costs and total costs would change.

~ TC line drops, meaning a lower break even output.

~ Margin of safety would have increased.

~ Vice versa for an increase in fixed costs.

Question 18

What Are The Benefits Of Break Even?
(4 Points)

Answer 18

~ Simplifies complex information.

~ Shows profit or loss at different levels.

~ Aids decision making, financial planning and forecasting.

~ Provides a target.

Question 19

What Are The Drawbacks Of Break Even?
(4 Points)

Answer 19

~ Based on predictions and assumptions.

~ Excludes external factors and does not adjust to changing conditions.

~ Ignores capacity constraints and inventory.

~ Short term focus, does not consider the long term.