Break-even (AQA A Level Business): Flashcards
Exam code: 7132
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Define break-even analysis.
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Define break-even analysis.
Break-even analysis is a tool that helps a business work out how much it needs to sell to cover all of its costs.
Define fixed costs.
Fixed costs are costs that stay the same regardless of how many units a business produces or sells, so they must be paid even if output is zero.
True or False?
Raw materials and packaging are examples of variable costs.
True.
Raw materials and packaging are variable costs, which change in direct proportion to output. Rent and insurance are examples of fixed costs.
What three pieces of information does a business need to carry out a break-even analysis?
A business needs its fixed costs, its variable costs per unit and its selling price per unit.
How are total costs calculated?
Total costs are calculated using this formula:
Total costs = Fixed costs + (Variable cost per unit × Output)
Revenue is calculated by multiplying the selling price per unit by the ___________.
Revenue is calculated by multiplying the selling price per unit by the quantity sold.
Define contribution.
Contribution is a product's selling price minus the variable costs directly involved in producing that unit.
Contribution = Selling price per unit − Variable costs per unit
Define break-even point.
The break-even point is the level of output at which total revenue is exactly equal to total costs, so the business makes neither a profit nor a loss.
Break-even point = Fixed costs ÷ Contribution
True or False?
A business breaks even when its total contribution equals its total revenue.
False.
A business breaks even when its total contribution equals its fixed costs. Any contribution beyond that point becomes profit.
A business has fixed costs of £55,000, a selling price of £95 and variable costs of £19 per unit. How many units must it sell to break even?
Contribution is £95 − £19 = £76, so the break-even point is £55,000 ÷ £76 = 723.68 units. This is rounded up to 724 units, because only whole units can be sold.
Define margin of safety.
The margin of safety is the difference between the actual level of output of a business and its break-even level of output.
Margin of safety = Actual level of output − Break-even level of output
Banks and investors often ask for break-even analysis as part of a business plan to assess financial __.
Banks and investors often ask for break-even analysis as part of a business plan to assess financial risk.
What are two limitations of break-even analysis?
It assumes all output is sold, and it assumes the selling price and variable costs stay constant.
True or False?
Break-even analysis takes account of external factors such as changes in competitor pricing.
False.
Break-even analysis does not account for external factors, such as changes in competitor pricing or consumer demand.
Define break-even chart.
A break-even chart is a visual representation of the break-even point, showing fixed costs, total costs and revenue over a range of output.
True or False?
On a break-even chart, the fixed costs line is horizontal.
True.
The fixed costs line is horizontal, because fixed costs do not change as output increases.
On a break-even chart, what are total costs made up of at zero output?
At zero output, total costs are made up exclusively of fixed costs.
Why does the total costs line slope upwards on a break-even chart?
The total costs line slopes upwards because total variable costs increase as output increases.
The revenue line slopes more _____ than the total costs line, so the two lines cross at some point.
The revenue line slopes more steeply than the total costs line, so the two lines cross at some point.
How is the margin of safety shown on a break-even chart?
The margin of safety is the difference on the x-axis between the actual level of output and the break-even point.
How is the profit made at a given level of output shown on a break-even chart?
Profit is shown by the space between the revenue and total cost lines at that level of output.
Which three variables affect the break-even point?
The break-even point is affected by changes in the selling price, the variable cost per unit and the total fixed costs.
True or False?
A decrease in variable costs increases the break-even point.
False.
A decrease in variable costs lowers total costs at each level of output, so the break-even point falls.
What happens to the break-even point if the selling price increases?
Revenue rises at each level of output, so the break-even point falls and fewer units need to be sold to break even.
What happens to the break-even point if fixed costs increase?
The total costs line shifts upwards at each level of output, so the break-even point increases.
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