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Break Even
BTEC Foundation Diploma Unit 3
| Question | Answer |
|---|---|
| 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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