break even analysis

Q: What is breakeven analysis?

A: Breakeven analysis is a financial tool used to determine the level of output or sales needed for a business to cover its total costs (both fixed and variable), where the business makes neither a profit nor a loss.

Q: What is contribution in business?

A: Contribution is the difference between sales and variable costs, representing the amount that contributes towards covering fixed costs and generating profit.

Q: How do you calculate contribution per unit?

A: Contribution per unit = Selling price per unit - Variable cost per unit.

Q: What is the formula for calculating total contribution?

A: Total contribution = Contribution per unit x Number of units sold.

Q: How is profit calculated using contribution?

A: Profit = Total contribution - Fixed costs.

Q: What are the assumptions made when calculating breakeven?

A: 1. Selling price per unit stays constant. 2. Variable costs vary in direct proportion to output. 3. All output is sold. 4. Fixed costs do not change with output.

Q: How do you calculate breakeven output using a formula?

A: Breakeven output (units) = Fixed costs / Contribution per unit.

Q: What are the three methods for calculating breakeven?

A: 1. Using a table (or spreadsheet). 2. Using a formula. 3. Using a graph/chart.

Q: What is the significance of the breakeven point?

A: The breakeven point is where total sales equal total costs. At this point, a business neither makes a profit nor a loss.

Q: What is the impact of fixed costs on breakeven analysis?

A: Fixed costs remain constant regardless of the level of output and are a key factor in determining the breakeven point.

Q: How do changes in output affect breakeven?

A: As output increases, the total contribution increases, helping to cover fixed costs and eventually lead to profit.

Q: What is the breakeven output in the example provided with fixed costs of £40,000 and a contribution of £6 per unit?

A: Breakeven output = £40,000 / £6 = 6,666 units.

Q: How does a breakeven chart help in decision-making?

A: A breakeven chart visually shows the relationship between sales, costs, and profit, helping businesses make informed decisions about pricing, cost management, and production levels.