2.2.3 Break Even

Question 1

Define break even

Answer 1

Is the point at which a business is not making a profit or a loss

Question 2

After reaching break even each additional unit sold will contribute towards

Answer 2

Profit

Question 3

How do you calculate break even

Answer 3

Fixed cost / contribution

Question 4

How do you calculate

Answer 4

Selling price - variables

Question 5

How do you calculate total contribution

Answer 5

Contribution x units

Question 6

•Before reaching break-even a business is operating at a

Answer 6

Loss

Question 7

What is contribution

Answer 7

• In business each time a product is sold or service provided what does the money generated contribute towards?
• 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
• Each time an item is sold the difference between the selling price and the variable cost is contributed towards the fixed cost

Question 8

What is the Margin of safety

Answer 8

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

Question 9

How do you Calculate margin if safety

Answer 9

Actual output level -Break even level of output

Question 10

Changing variables to keep in mind when handling break even

Answer 10

• Businesses should treat break-even with a degree of caution
• It is based on the assumption that costs and revenues will be static, in reality this is not true
• Businesses are advised to consider the variables that might change and possibly look at a number of scenarios
• Variables can change for the better or worse
• What variables might change?
• Fixed costs
• Landlord puts rent up
• Bank changes interest rates
• Management want pay increase

Question 11

Strengths of break even

Answer 11

•Allows businesses to calculate the minimum number of sales needed before starting to make a profit and therefore for see if a venture is viable

Can calculate the level of profit or loss at different levels

Can predict the outcome of changing variables

Provides a target

Aids decision making

An integral part of a business plan when seeking finance

Question 12

Weaknesses of break even

Answer 12

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

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

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

Is an predicted costs and revenue