Break-even

Question 1

What’s the break-even point (or break-even output)

Answer 1

The level of sales a business needs, to cover its total costs

• At break even point, total fixed costs + total variable costs = total revenue

Question 2

What does it mean when sales are below break-even point

Answer 2

Costs are more than revenue, the business makes a loss

Question 3

What does it mean when sales are above the break-even point

Answer 3

Revenue exceeds costs, the business makes a profit

Question 4

Why should businesses do a break-even analysis

Answer 4

• To find the break-even point
• Tells them how much they will need to sell to break even
• Loaning money to the business, may need a break-even analysis as part of business plan to help them decide whether to lend money or not
• Established businesses preparing to launch new products use break-even analysis to work out how much profit they’re likely to make

Question 5

What’s contribution per unit

Formula for it

Answer 5

The difference between the selling price of a product and the variable costs per unit (cost it takes to produce)

Contribution per unit= selling price - variable cost per unit

Question 6

What is total contribution used for

Answer 6

Is used to pay fixed costs

• The amount left over is profit

Question 7

What’s break-even point in terms of total contribution

Answer 7

Total contribution = fixed costs

Question 8

If you know total fixed costs and contribution per unit, how do you calculate break-even point

Answer 8

Break-even point= Total fixed costs/ Contribution per unit

Question 9

What do break even charts show

Answer 9

They show costs and revenue plotted against output.

Question 10

Why do businesses use break even charts

Answer 10

To see how costs and revenue vary with different levels of output

Question 11

What’s labelled on the x-axis and what’s labelled on the y-axis

Answer 11

X-axis = Output

Y-axis = Revenue and costs

Question 12

What do the three lines drawn on the chart represent

Answer 12

Fixed costs
Total costs
Revenue

Question 13

Where’s break-even point shown on the graph

How’s it shown

Answer 13

Where the revenue line crosses total costs line

It’s shown through the output
E.g. break even point= 150 units

Question 14

You can use break-even chart to identify what

Answer 14

Profit or loss that would be made at a specified level of output

Question 15

How can you find the profit or loss on a break-even chart

Answer 15

• You find value for total costs and for revenue at your chosen level of output
• Then subtract the total costs from the revenue
• If the answer is negative then it’s a loss, if its positive then its a profit

Question 16

What can you change to affect the break even point

Answer 16

• Change the variable costs

- Or change the price of the product

Question 17

What happens to the revenue line if price increases

Answer 17

The revenue line gets steeper, so the break even point is lowered - if you charge more, you don’t need to sell as many to break even

Question 18

What’s the margin of safety

Answer 18

The amount between actual output and break-even

Margin of safety= actual output - break even output

Question 19

What does margin of safety show

Answer 19

Shows how much the output can change before they start making a loss, or a profit

Question 20

How does knowing margin of safety help a business

Answer 20

• Helps them make important decisions
• If margin of safety is low, they can take action to increase it by either lowering costs or increasing revenue
• This would lower his break-even output, so he’d have a greater margin of safety

Question 21

Why’s a big margin of safety useful

Answer 21

It means less risk

Question 22

Advantages for Break even analysis

Answer 22

• Easy to do
• Its quick- managers can see break-even output and margin of safety immediately so can take quick action
• Business can use break-even analysis to persuade sources of finance for money
• Break- even analysis helps decide whether to launch a product or notice

Question 23

Disadvantages for break even analysis

Answer 23

• Break-even analysis assumes variable costs always rise steadily. Not the case, E.g. can buy in bulk
• Break-even analysis is simple for one product, however majority of businesses sell multiple so can get complicated
• If data is inaccurate, results will be wrong
• Break even analysis assumes businesses sell all products with no wastage. E.g. a restaurant chucks food away due to fewer customers than expected