5.5 Break Even Analysis

Describe what the break even point shows

• production level when a business is neither making a profit or loss

• how many items to make and sell

• how much profit a business is making

• where a business has more fixed costs than variable costs

Identify the formula for contribution per unit

• cost price - selling price

• fixed costs - variable costs

• selling price - average variable cost

• total revenue - total variable costs

Identify limitation(s) to calculating break even

• assumes all products made are sold

• assumes variable costs are constant

• assumes fixed costs must be paid

• all of these options

To construct the Break Even graph and find the break-even point, you must plot Total Costs and ........

• Total Production

• Total Revenue

• Total Variable Costs

• Total Units

Total fixed costs = £275,450;

selling price is £16;

variable cost per unit is £14.75.

Calculate the Break Even Quantity.

• 220,360

• 150,300

• 183,633

• 225,120

Answer explanation

£275,450 / (£16 - £14.75)

£275,450 / (£1.25)

220,360 units

Total costs are £50,000.

100 units were sold.

Total fixed costs are £20,000.

Calculate the variable cost per unit.

• £300

• £500

• £200

• Cannot be calculated

Answer explanation

Total costs = 50,000. Total fixed costs = 20,000. Therefore, total variable costs = 30,000.

30,000 / 100 = 300 AVC

Fixed costs: = £30,000

Variable cost: = £200 per photo shoot

Forecast output (Sales): = 140 photo shoots

Selling price: = £1000 per photo shoot

Calculate the Total Contribution?

• £112 000

• £112 500

• £375

• £800

Answer explanation

Price = £1000

£1000 x 140 = £140,000 revenue

AVC = £200 per unit

£200 x 140 = £28,000 TVC

Revenue - TVC

£140,000 - £28,000

= £112,000 total contribution

or

(£1000 - £200) x 140

= £112,000

When a business has earned enough revenue to pay its costs and begin to make a profit, the business has reached its

• break-even point

• variable-cost margin

• fixed cost

• selling price

Some business costs are classified as fixed costs because they

• must be paid within a set time

• don't change when production levels change

• are unpredictable and must be estimated

• cost all businesses the same amount

If a business produces and sells twice as may products, according to break-even analysis, its total variable costs will

• remain the same

• decrease

• triple

• double