Break-even analysis

Question 1

How do you calculate the break even point in units

Answer 1

Fixed costs ÷ contribution per unit

Question 2

How do you calculate break even in £s

Answer 2

Break even units x selling price

Question 3

How do you calculate margin of safety as a percentage

Answer 3

(Current output - break even output) ÷ current output x 100

Question 4

How do you calculate margin of safety

Answer 4

Maximum output - break even output

Question 5

How do you calculate the output required to give the target profit

Answer 5

(Fixed costs + target profit) ÷ contribution per unit

Question 6

How do you calculate profit volume ratio/ contribution sales ratio

Answer 6

Contribution ÷ selling price

Question 7

How do you calculate contribution

Answer 7

Selling price per unit - variable costs per unit

Question 8

Give 3 reasons when break even analysis is useful

Answer 8

Before starting a new business

When making changes e.g. increase production, reduce sales

To measure profit and losses

To answer ‘what if’ questions (sensitivity analysis)

Question 9

Give 4 limitations of break even analysis

Answer 9

Chart can only be applied to a single product

Chart can be time consuming to prepare

It assumes that fixed costs remains constant over all levels of output

It assumes variable costs are the same per unit across all levels of output

It assumes sales prices are constant

Assumes all output is sold

Concentrates too much on break-even point - to much reliance and doesn’t try to control costs

It ignores uncertainty in the estimates of fixed and variable costs