2.2.3 Break Even

Question 1

What does Break even mean?

Answer 1

Break-even is the point at which a business is not making a profit or a loss i.e. it is just breaking even

Question 2

At what point does a business Break even?

Answer 2

At the point total costs are the same as total revenue

TC = TR

Question 3

What is Break-even output?

Answer 3

Break-even output is the number of items that a business must sell to reach Break even

Question 4

What does the word contribution mean?

Answer 4

when we contribute we give towards something

Question 5

In business each time a product is sold or service provided what does the money generated contribute towards?

Answer 5

It has to firstly pay for its own variable costs and then contribute towards the fixed costs
until there are enough contributions to cover all the fixed costs the business can not start to make a profit

Question 6

What is the equation for Contribution?

Answer 6

Contribution = selling price – variable cost

Question 7

What is Contribution per unit?

Answer 7

Contribution per unit is the difference between selling price per unit and variable cost per unit i.e. how much is left to contribute
Firstly to fixed costs and secondly to profit

Question 8

If I sell t-shirts at £11.50 and each one costs me £4.00 to make, what is my contribution?

Answer 8

£7.50 (SP £11.50 – VC £4.00)

Question 9

What is Total contribution?

Answer 9

Total contribution is the difference between total sales revenue and total variable costs

Question 10

If I sell 100 t-shirts total sales revenue is (100 x £11.50) £1150 and total variable cost is (100 x £4.00) £400
What is my total contribution?

Answer 10

£1150 - £400 = £750

Question 11

How can Contribution per unit be used to calculate break-even?

Answer 11

Fixed cost / contribution = break-even point

Question 12

Fixed costs = £60 000
Variable costs = £6.50
Selling price = £25.25
Sales 4000 units
What is the contribution per unit?

Answer 12

£18.75

Question 13

Fixed costs = £60 000
Variable costs = £6.50
Selling price = £25.25
Sales 4000 units
What is the total contribution?

Answer 13

£75,000

Question 14

Fixed costs = £60 000
Variable costs = £6.50
Selling price = £25.25
Sales 4000 units
What is the break-even level of output?

Answer 14

3.200 units

Question 15

What is Margin of safety?

Answer 15

Margin of safety is how much actual output is above the break-even level of output

T-shirts break-even = 2000 t-shirts
Assume output = 3000 t-shirts
Margin of safety = 1000 t-shirts

Question 16

What is the calculation for Margin of safty?

Answer 16

Actual output level – break-even level of output

Question 17

What variables might change to Fixed costs to change the break-even point?

Answer 17

Landlord puts rent up
Bank changes interest rates
Management want pay increase

Question 18

What variables might change to Variable costs to change the break-even point?

Answer 18

Raw materials change in price
Minimum wage is increased
Utility companies change price

Question 19

What variables might change to Selling prices

to change the break-even point?

Answer 19

New competition enters the market

Positive word of mouth puts demand up

Question 20

What are some strengths of Break-even?

Answer 20

Can calculate the level of profit or loss at different levels
Can predict the outcome of changing variables

Provides a target

Aids decision making

Question 21

What are some weaknessess of Break-even?

Answer 21

Is based on predicted costs and revenues

Even fixed costs can vary in reality, especially in the long run

Ignores changes in variable costs or selling price as items are bought or sold in larger quantities

Only indicates the number of sales needed does not ensure actual sales will materialise