Break-Even Analysis

Q1 Fill in the gaps – one mark is lost for each incorrect answer

If a business is breaking even it is neither making a profit nor a loss To calculate how many
units a business must sell to break-even, they must first calculate their contribution per
unit. This equals the average selling price minus the variable cost.

Break-even output is calculated by the following formula: fixed cost divided by

contribution.
The higher the firm’s fixed cost, the greater the break-even output will be. Margin of safety
refers to the difference in output between the break-even output and the number of units
sold.

Choose from: contribution per unit, average selling price, margin of safety, loss, variable cost
per unit, fixed costs

/3

Q2 Calculation time

 Average selling price: £4

 Variable cost per unit: £1.50
 Total fixed costs: £50,000
 Planned output: 25,000
Using the data above, calculate the following:
Contribution per unit
4-1.5=2.5

Total contribution if planned output is sold

2.5x25000=62500

Break-even output
50000/4-1.5 = 20000

Margin of safety if planned output is sold

25000-20000=5000

Adapted from © Tutor2u Limited www.tutor2u.net

 Break-Even Analysis

/8

Q3 The Break-Even Chart

120

Total revenue
100
Costs and Revenues (£)
80
Total costs

60
Total variable
costs
40

20 Fixed costs

0
0 1 2 3 4 5 6 7 8 9 10
Output

Use the chart to answer the following questions:

1. What is this firm’s break-even output?

4 units 40 cost

2. What is their margin of safety if four units are sold?

0

3. What profit/loss will be made if eight units are sold?

80-60=20

4. Imagine fixed costs double. Amend the diagram above and calculate the new break-even

Adapted from © Tutor2u Limited www.tutor2u.net

Break-Even Analysis

output. 8

/8

4 Explain the impact of the following changes on a firm’s break-even point

4.1 A shop’s rent increases.

As a result of shop’s rent increases, total costs increased

Break-even increased as well

4.2 The business lowers its selling price.

If selling price goes down, break-even goes down as well

Adapted from © Tutor2u Limited www.tutor2u.net

Break-Even Analysis

4.3 Raw material costs fall. Break-even will fall

/6

Q5 True or False?
5.1 Break-even output is calculated by fixed costs divided by total contribution.
False

5.2 The wider range of products and prices a business has, the more useful break-even
analysis is.
false

5.3 If a business has a positive margin of safety, it will make a profit.

True
5.4 If total contribution is less than the total fixed costs, the business will break-even.

false
5.5 A rise in selling price will make the total revenue curve steeper. true

/5

Total / 30

Adapted from © Tutor2u Limited www.tutor2u.net