Break-Even Analysis

Summary

Break-even point (BEP) is the sales volume at which total revenue equals total cost.

Formulae:

• BEP (units) = Fixed Costs / Contribution per unit
• Contribution = Selling Price − Variable Cost
• Margin of Safety = Actual Sales − BEP Sales

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Multiple-Choice Questions (MCQs):

1. Contribution per unit is:

   • A. Selling price + variable cost
   • B. Selling price − variable cost ✅
   • C. Fixed cost − selling price
   • D. Variable cost only
     Explanation: Contribution = SP − VC.

2. BEP is reached when:

   • A. Profit is max
   • B. Total revenue = total cost ✅
   • C. Sales exceed target
   • D. Costs are lowest
     Explanation: At BEP, there’s no profit or loss.

3. If fixed costs = £5,000, contribution = £10:

   • A. BEP = 500 units
   • B. BEP = 500 units ✅
   • C. BEP = 5,000 units
   • D. BEP = 50 units
     Explanation: 5,000 / 10 = 500.

4. Margin of safety shows:

   • A. Minimum revenue
   • B. Risk buffer ✅
   • C. Total contribution
   • D. Profits only
     Explanation: It shows how much sales can drop before a loss.

5. Break-even point increases if:

   • A. Contribution increases
   • B. Fixed cost decreases
   • C. Fixed cost increases ✅
   • D. Variable cost decreases
     Explanation: Higher FC = higher BEP.