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Break Even

BTEC Foundation Diploma Unit 3

QuestionAnswer
What is Break Even? Break-even is the point at which a business is not making a profit or a loss i.e. it is just breaking even
What is the Break Even Output? Break-even output is the number of items that a business must sell to reach this point
What is contribution used for? 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
What is contribution per unit? Contribution per unit is the difference between selling price per unit and variable cost per unit
What is total contribution? Total contribution is the difference between total sales revenue and total variable costs
What is the formula for contribution? Contribution = selling price – variable costs
What is the formula for Break Even? Fixed cost / contribution per unit = break-even point
What is the Margin of Safety? Margin of safety is how much actual output is above the break-even level of output
Why should Businesses 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
Break Even can be affected by a change in fixed costs. Give three examples. Landlord puts rent up/Bank changes interest rates/Management want pay increase
Variable Costs changing can lead to the break even being inaccurate. State three examples. Raw materials change in price/Minimum wage is increased/Utility companies change price
What are the disadvantages of Break Even? Is based on predicted costs and revenues/Even fixed costs can vary in reality/Ignores changes in variable costs or selling price /Only indicates the number of sales needed does not ensure actual sales will materialise
What are the advantages of Break Even? Can calculate the level of profit or loss at different levels/Can predict the outcome of changing variables/Provides a target/An integral part of a business plan when seeking to secure finance/Aids decision making
What is Sales Volume? Sales volume is the amount of sales expressed as a number of units sold
What is Sales revenue? Sales revenue is the amount of sales expressed as the total sum of money spent by consumers
What is the formula for Sales Volume? Sales revenue / selling price
What is the formula for Sales revenue? Selling price x quantity sold
What is revenue? Revenue is the money coming in from the sale of goods and services
What are variable costs? Variable costs change in relation to the number of items produced e.g. raw materials
How can total variable costs be calculated? Variable costs per unit are multiplied by the number of units to calculate total variable costs (TVC)
What is the formula for total costs? TC = FC + TVC
Created by: durquhart1
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