ch 3: break-even

Question 1

is of vital importance in determining the practical application of cost functions.

Answer 1

Break-even analysis

Question 2

It is a function of three factors, i.e., sales volume, cost and profit.

Answer 2

Break-even analysis

Question 3

It aims at classifying the dynamic relationship existing between total cost and sale volume of a company.

Answer 3

Break-even analysis

Question 4

Break-even analysis is also known as?

Answer 4

“cost-volume-profit analysis”

Question 5

the operating condition that exists when a company’a sales reach a point equal to all expenses incurred in attaining that level of sales.

Answer 5

Break-even

Question 6

is a financial tool which helps a company to determine the stage at which the company, or a new service or a product, will be profitable.

Answer 6

Break-even analysis

Question 7

In other words, it is a financial calculation for determining the number of products or services a company should sell or provide to cover its costs (particularly fixed costs).

Answer 7

Break-even analysis

Question 8

is a situation where an organisation is neither making money nor losing money, but all the costs have been covered.

Answer 8

Break-even analysis

Question 9

s useful in studying the relation between the variable cost, fixed cost and revenue.

Answer 9

Break-even analysis

Question 10

Generally, a company with low fixed costs will have a?

Answer 10

low break-even point of sale

Question 11

In the diagram above, the line OA represents the?

Answer 11

variation of income at varying levels of production activity (“output”).

Question 12

OB represents the?

Answer 12

total fixed costs in the business.

Question 13

As output increases? meaning that?

Answer 13

variable costs are incurred, meaning that total costs (fixed + variable) also increase.

Question 14

At low levels of output?

Answer 14

Costs are greater than Income.

Question 15

At the point of intersection, P? hence?

Answer 15

costs are exactly equal to income, and hence neither profit nor loss is made

Question 16

Components of Break-even Analysis

Answer 16

• Fixed Cost
• Variable Cost
• Contribution Margin
• Contribution Margin Ratio
  *

Question 17

are those business costs that are not directly related to the level of production or output.

Answer 17

Fixed costs

Question 18

In other words, even if the business has a zero output or high output, the level of these will remain broadly the same.

Answer 18

fixed costs

Question 19

In the long-term, these can alter, - perhaps as a result of investment in production capacity (e.g. adding a new factory unit) or through the growth in overheads required to support a larger, more complex business.

Answer 19

fixed costs

Question 20

Rent and rates

(fixed or variable cost?)

Answer 20

fixed costs

Question 21

Depreciation

(fixed or variable cost?)

Answer 21

fixed costs

Question 22

Research and development

(fixed or variable cost?)

Answer 22

fixed costs

Question 23

Marketing costs (non- revenue related)

(fixed or variable cost?)

Answer 23

fixed costs

Question 24

Administration costs

(fixed or variable cost?)

Answer 24

fixed costs

Question 25

Utilities ## Footnote (fixed or variable cost?)

Answer 25

fixed costs

Question 26

Internet ## Footnote (fixed or variable cost?)

Answer 26

fixed costs

Question 27

Water ## Footnote (fixed or variable cost?)

Answer 27

fixed costs

Question 28

Electricity ## Footnote (fixed or variable cost?)

Answer 28

fixed costs

Question 29

Heating ## Footnote (fixed or variable cost?)

Answer 29

fixed costs

Question 30

are those costs which vary directly with the level of output.

Answer 30

Variable costs

Question 31

They represent **payment output-related** inputs such as raw materials, direct labour, fuel and revenue- related costs such as commission.

Answer 31

Variable costs

Question 32

raw materials ## Footnote (fixed or variable cost?)

Answer 32

Variable costs

Question 33

direct labour ## Footnote (fixed or variable cost?)

Answer 33

Variable costs

Question 34

fuel ## Footnote (fixed or variable cost?)

Answer 34

Variable costs

Question 35

revenue-related cost ## Footnote (fixed or variable cost?)

Answer 35

Variable costs

Question 36

commission ## Footnote (fixed or variable cost?)

Answer 36

Variable costs

Question 37

A distinction is often made between "Direct" and "Indirect"

Answer 37

variable costs.

Question 38

are those which can be directly attributable to the production of a particular product or service and allocated to a particular cost centre.

Answer 38

Direct variable costs

Question 39

Raw materials and the wages those working on the production line are good examples.

Answer 39

Direct variable costs

Question 40

cannot be directly attributable to production but they do vary with output.

Answer 40

Indirect variable costs

Question 41

These include depreciation (where it is calculated related to output - e.g. machine hours), maintenance and certain labour costs.

Answer 41

Indirect variable costs

Question 42

is a product’s price minus all associated variable costs, resulting in the **incremental profit** earned for each unit sold.

Answer 42

Contribution margin

Question 43

The total contribution margin generated by an entity represents the total earnings available to pay for fixed expenses and to generate a profit.

Question 44

This concept is useful for deciding whether to allow a lower price in special pricing situations.

Answer 44

contribution margin

Question 45

,If this, at a particular price point, is excessively low or negative, it would be unwise to continue selling a product at that price.

Answer 45

contribution margin

Question 46

It is also useful for determining the profits that will arise from various sales levels.

Answer 46

contribution margin

Question 47

This is the difference between a company's sales and variable expenses, expressed as a percentage.

Answer 47

Contribution Margin Ratio

Question 48

The total margin generated by an entity represents the total earnings available to pay for fixed expenses and generate a profit.

Answer 48

Contribution Margin Ratio

Question 49

When used on an individual unit sale, the ratio expresses the proportion of profit generated on that specific sale.

Answer 49

Contribution Margin Ratio

Question 50

The contribution margin should be relatively high, since it must be sufficient to also cover fixed expenses and administrative overhead. Also, the measure is useful for determining whether to allow a lower price in special pricing situations. If the contribution margin ratio is excessively low or negative, it would be unwise to continue selling a product at that price point, since the company would have considerable difficulty earning a profit over the long term.

Answer 50

Contribution Margin Ratio

Question 51

Assumptions of Break-even Analysis

Answer 51

1. The total costs may be classified into fixed and variable costs. It ignores semi-variable cost. 2. The cost and revenue functions remain linear. 3. The price of the product is assumed to be constant. 4. The volume of sales and volume of production are equal. 5. The fixed costs remain constant over the volume under consideration. 6. It assumes constant rate of increase in variable cost. 7. It assumes constant technology and no improvement in labour efficiency.

Question 52

dividing the total fixed costs of production by the price per unit less the variable costs to produce the product.

Answer 52

break-even point formula

Question 53

Since the price per unit minus the variable costs of product is the definition of the contribution margin per unit, simply rephrase the equation by dividing the fixed costs by the contribution margin

Answer 53

break-even point formula

Question 54

This computes the total number of units that must be sold in order for the company to generate enough revenues to cover all of its expenses.

Answer 54

break-even point formula

Question 55

Next, this is calculated by multiplying the price of each unit by the answer from the first equation.

Answer 55

break-even formula in sales dollars

Question 56

This will provide the total dollar amount in sales needed to achieve in order to have zero loss and zero profit. Now, compute the total number of units that need to be sold in order to achieve a certain level profitability without break-even calculator.

Question 57

First, take the desired dollar amount of profit and divide it by the contribution margin per unit. The computes the number of units needed to sell in order to produce the profit without taking in consideration the fixed costs. Then add back in the break-even point number of units.

Question 58

Use of Break-even Analysis

Answer 58

✓ It helps to determine remaining/unused capacity of the company once the breakeven is reached. This will help to show the maximum profit on a particular product/service that can be generated. ✓ It helps to determine the impact on profit on changing to automation from manual (a fixed cost replaces a variable cost). ✓ It helps to determine the change in profits if the price of a product is altered. ✓ It helps to determine the amount of losses that could be sustained if there is a sales downturn.

Question 59

is very useful for knowing the overall ability of a business to generate a profit.

Answer 59

break-even analysis

Question 60

In the case of a company whose breakeven point is near to the maximum sales level, this signifies that?

Answer 60

it is nearly impractical for the business to earn a profit even under the best of circumstances. Therefore, it’s the management responsibility to monitor the breakeven point constantly. This monitoring certainly reduces the breakeven point whenever possible.