Breakeven

1. What is a business doing at the breakeven point?

Making a profit

Making a loss

Making neither a profit or a loss

Making both a profit and a loss

This is the whole concept of breakeven. You want to know when all costs are covered by revenue

Explanation

This is the whole concept of breakeven. You want to know when all costs are covered by revenue

2. If the variable cost of an item is £10 and its selling price is £25, what is the contribution?

£35

-£15

Don't know

£15

Contribution is the accounting term we use for Selling price - variable costs. It forms the bottom section of all breakeven point calcuations

Explanation

Contribution is the accounting term we use for Selling price - variable costs. It forms the bottom section of all breakeven point calcuations

3. Carrying on from question 3 now. Fixed costs are £60,000. Calculate the breakeven point

£5,000

£4,000

£6,000

Don't know

So the formula to calculate breakeven is: Fixed costs divided by Contribution per unit.
So in this question you need to divide £60,000 by £15

Explanation

So the formula to calculate breakeven is: Fixed costs divided by Contribution per unit.
So in this question you need to divide £60,000 by £15

4. At the breakeven point...

Fixed costs - Variable costs = Sales revenue

Fixed costs + Variable costs = Sales revenue

Fixed costs x Variable costs = Sales revenue

Fixed costs/Variable costs = Sales revue

This is fundamental to your understanding of breakeven. Think back to Nathan. When he sold 125 cakes he made £75.00 of sales (125 x 60p). This was the same as his total variable costs £25 (125 x 20p) and this fixed costs of £50. So he didn't make a profit or a loss.

Explanation

This is fundamental to your understanding of breakeven. Think back to Nathan. When he sold 125 cakes he made £75.00 of sales (125 x 60p). This was the same as his total variable costs £25 (125 x 20p) and this fixed costs of £50. So he didn't make a profit or a loss.

5. Why is it important for businesses to know the breakeven points of their products?

It isn't important

So they can use the information when preparing financial statements

It can be used in the process of planning

Because its an important calculation in accounting

If a business knows the breakeven point for a particular product is 10,000 units it does not want to sell 10,000 units, it has to sell more so that it will make a profit. So at the planning stage they can come up with strategies to achieve this objective.

Explanation

If a business knows the breakeven point for a particular product is 10,000 units it does not want to sell 10,000 units, it has to sell more so that it will make a profit. So at the planning stage they can come up with strategies to achieve this objective.