Break Even

Question 1

What is break-even?

Answer 1

This is the number of products or units needed to be sold to match revenue and costs.

Question 2

How do you calculate breakeven?

Answer 2

Break Even = Fixed Costs / Contribution per unit

Question 3

How do you calculate Contribution per unit?

Answer 3

Selling Price - Variable Cost per unit

Question 4

Benefit of Break Even? (4)

Answer 4

1. Calculating break even will predict the amount of units they need to sell
2. This can be compared with sales forecasts to see if they are making a loss
3. This can allow them to reduce the break even in order to increase contribution per unit
4. Preventing loss

Question 5

1. Drawback of break even? (7)

Answer 5

1. Break Even assumes prices remain constant
2. As Sales Volume Increase, business’ will have to buy more raw materials
3. May benefit from purchasing economies of scale
4. Gain a discount from Bulk Buying
5. Leads to variable costs falling as output rises
6. Increasing contribution per unit
7. BE may ignore this so therefore becomes inaccurate