What is break-even analysis ?

Break-even analysis determines the number of units a business must sell to reach a point where its revenue equals its total costs.

What are fixed costs ?

Fixed costs are costs that do not change regardless of the level of production or sales e.g rent.

What are variable costs ?

Variable costs are costs that vary with the level of production or sales.

What is the contribution per unit ?

Contribution per unit is the amount by which the selling price of a unit exceeds the cost of making the unit. It contributes towards paying off the fixed costs.

What is total contribution ?

Total contribution is the combined contribution per unit generated from the sale of each product.

Which elements are included in a break-even chart ?

Elements included on a break-even chart are: Fixed costs line over a range of output Total costs line over a range of output Revenue line over a range of output The break-even point Profit or loss made at each level of output The margin of safety

What is the break-even point ?

The break-even point is the level of output at which total revenue is exactly equal to total costs , meaning the business is making neither a profit nor a loss.

True or False? You should always round down the break even output to the nearest whole number.

False . You should always round up the break even point to the nearest whole number because only whole products can be sold.

What is the 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 .

What is meant by the term contribution ?

Contribution is the amount of money that the sale of a particular product contributes towards paying off the fixed costs of a business.

True or False? Total contribution is equal to the total profit made by a business.

False . Total contribution is not the total profit made by the business because it does not take into account the fixed costs of the business.

True or False? An increase in selling price reduces the break-even point.

True . An increase in selling price reduces the break-even point.

True or False? An increase in variable costs decreases the break-even point.

False . An increase in variable costs increases the break-even point.

True or False? A decrease in fixed costs decreases the break-even point.

True . A decrease in fixed costs decreases the break-even point.

What role does break-even analysis play in pricing decisions ?

Break-even analysis helps determine the minimum price required to cover costs and achieve the desired level of profit.

In the context of break-even analysis, what is sensitivity analysis ?

Sensitivity analysis allows businesses to evaluate the impact of changes in variables such as costs, prices, and sales volumes on the break-even point.

True or False? Break even analysis can indicate the financial viability of a business.

True . Break even analysis can indicate the financial viability of a business.

True or False? Break-even analysis assumes constant selling prices and costs.

True . Break-even analysis assumes constant selling prices and costs.

True or False? Break even analysis is particularly useful where a business produces more than one product.

False . Break even analysis is less useful where a business produces more than one product.

True or False? Break even analysis assumes that all output is sold.

True . Break even analysis assumes that all output is sold.

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5.4 Break-even Analysis (DP IB Business Management)

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What is break-even analysis?
Break-even analysis determines the number of units a business must sell to reach a point where its revenue equals its total costs.
What are fixed costs?
Fixed costs are costs that do not change regardless of the level of production or sales e.g rent.
What are variable costs?
Variable costs are costs that vary with the level of production or sales.
How is sales revenue calculated?
Formula.
$Sales revenue = Number of items sold x Selling price$
What is the contribution per unit?
Contribution per unit is the amount by which the selling price of a unit exceeds the cost of making the unit. It contributes towards paying off the fixed costs.
State the formula to calculate contribution per unit.
Formula.
$Contribution per unit = Selling price per unit - Variable cost per unit$
What is total contribution?
Total contribution is the combined contribution per unit generated from the sale of each product.
Which elements are included in a break-even chart?
Elements included on a break-even chart are:
- Fixed costs line over a range of output
- Total costs line over a range of output
- Revenue line over a range of output
- The break-even point
- Profit or loss made at each level of output
- The margin of safety
What is the break-even point?
The break-even point is the level of output at which total revenue is exactly equal to total costs, meaning the business is making neither a profit nor a loss.
State the equation for calculating the break-even point.
Formula.
$Break - even point = \frac{Fixed costs}{Contribution per unit}$
True or False?
You should always round down the break even output to the nearest whole number.
False.
You should always round up the break even point to the nearest whole number because only whole products can be sold.
What is the 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.
State the formula used to calculate the margin of safety.
Formula.
$Margin of safety = Actual output - Breakeven output$
What is meant by the term contribution?
Contribution is the amount of money that the sale of a particular product contributes towards paying off the fixed costs of a business.
True or False?
Total contribution is equal to the total profit made by a business.
False.
Total contribution is not the total profit made by the business because it does not take into account the fixed costs of the business.
True or False?
An increase in selling price reduces the break-even point.
True.
An increase in selling price reduces the break-even point.
True or False?
An increase in variable costs decreases the break-even point.
False.
An increase in variable costs increases the break-even point.
True or False?
A decrease in fixed costs decreases the break-even point.
True.
A decrease in fixed costs decreases the break-even point.
What role does break-even analysis play in pricing decisions?
Break-even analysis helps determine the minimum price required to cover costs and achieve the desired level of profit.
In the context of break-even analysis, what is sensitivity analysis?
Sensitivity analysis allows businesses to evaluate the impact of changes in variables such as costs, prices, and sales volumes on the break-even point.
True or False?
Break even analysis can indicate the financial viability of a business.
True.
Break even analysis can indicate the financial viability of a business.
True or False?
Break-even analysis assumes constant selling prices and costs.
True.
Break-even analysis assumes constant selling prices and costs.
True or False?
Break even analysis is particularly useful where a business produces more than one product.
False.
Break even analysis is less useful where a business produces more than one product.
True or False?
Break even analysis assumes that all output is sold.
True.
Break even analysis assumes that all output is sold.

Previous: 5.3 LocationNext:6.1 The Business Management Toolkit

1. Topic 1
  6.1 The Business Management Toolkit

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5.4 Break-even Analysis (DP IB Business Management)

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1. Introduction to Business Management

1.1 What is a Business?

1.2 Types of Business Entities

1.3 Business Objectives

1.4 Stakeholders

1.5 Growth & Evolution

1.6 Multinational Companies (MNCs)

2. Human Resource Management

2.1 Introduction to Human Resource Management

2.2 Organisational Structure

2.3 Leadership & Management

2.4 Motivation & Demotivation

2.5 Communication

3. Finance & Accounts

3.1 Introduction to Finance

3.2 Sources of Finance

3.3 Costs & Revenues

3.4 Final Accounts

3.5 Profitability & Liquidity Ratio Analysis

3.6 Cash Flow

3.7 Investment Appraisal

4. Marketing

4.1 Introduction to Marketing

4.2 Marketing Planning

4.3 Market Research

4.4 The Marketing Mix (7 P's)

5. Operations Management

5.1 Introduction to Operations Management

5.2 Operations Methods

5.3 Location

5.4 Break-even Analysis

6. The Business Management Toolkit

6.1 The Business Management Toolkit