Break-even analysis
- Contribution margin
- CM = p − v
- Break-even quantity
- QBE = FC/(p − v)
- Target profit
- Q = (FC + profit)/(p − v)
- Profit
- π = (p − v)·Q − FC
- Margin of safety
- (Q − QBE)/Q
Business Fundamentals: cram pack
Formula sheets, the key method steps for every topic and 8 practice problems, with full solutions at the back.
1Formulas and methods
2Practice problems
1.Marketing principlesMedium
A car maker offers separate models and campaigns for students, families and luxury buyers. Which targeting strategy is this?
- ADifferentiated marketing
- BConcentrated marketing
- CMass customisation of one model
- DUndifferentiated marketing
2.Marketing principlesHard
A company launches a product that is easy to copy, with highly price-sensitive buyers and strong economies of scale. Which launch pricing strategy fits best?
- APrestige pricing
- BPenetration pricing
- CPrice skimming
- DCaptive product pricing
3.Economics conceptsMedium
Crowding out refers to:
- AOvercrowded public services
- BHigher government borrowing raising interest rates and reducing private investment
- CImports replacing domestic production
- DToo many firms entering a market
4.Economics conceptsHard
The "paradox of thrift" suggests that if all households try to save more during a recession:
- AInterest rates will rise sharply
- BInvestment and growth will rise immediately
- CTotal income may fall, so total saving does not rise
- DInflation will increase
5.Financial accountingMedium
Cost of sales is €600,000 and average inventory is €100,000. What is the inventory turnover?
- A16 times a year
- B60 times a year
- C0.17 times a year
- D6 times a year
6.Financial accountingHard
An asset is impaired when its carrying amount is higher than its:
- AResidual value only
- BDepreciation charge
- CRecoverable amount (the higher of fair value less costs of disposal and value in use)
- DOriginal purchase price
7.Break-even analysisMedium
A company sells 1 250 units at €23 each. The variable cost is €15 per unit and fixed costs are €4 000. Find the degree of operating leverage DOL at this sales level.
Q = 1 250p = €23v = €15F = €4 000
DOL =
8.Break-even analysisHard
A product sells for €11 per unit, with a variable cost of €6 per unit and fixed costs of €4 000 per year. Budgeted sales are 1 040 units. Find the margin of safety MS as a percentage of budgeted sales.
F = €4 000p = €11v = €6budget = 1 040
MS = %
3Solutions
1.Marketing principles
Answer: A · Differentiated marketing
Why this is the answer
Differentiated marketing targets several segments with different products or messages. It can raise sales but also costs.
Answer
A · Differentiated marketing
2.Marketing principles
Answer: B · Penetration pricing
Why this is the answer
Low prices build share quickly, lower unit costs through scale and discourage imitators. Skimming suits unique products with buyers who are less sensitive to price.
Answer
B · Penetration pricing
3.Economics concepts
Answer: B · Higher government borrowing raising interest rates and reducing private investment
Why this is the answer
When government borrowing raises interest rates, some private investment is no longer profitable, reducing the net effect of fiscal expansion.
Answer
B · Higher government borrowing raising interest rates and reducing private investment
4.Economics concepts
Answer: C · Total income may fall, so total saving does not rise
Why this is the answer
Higher saving reduces consumption and aggregate demand, lowering income; with lower income, aggregate saving may end up no higher, as Keynes argued.
Answer
C · Total income may fall, so total saving does not rise
5.Financial accounting
Answer: D · 6 times a year
Why this is the answer
€600,000 ÷ €100,000 = 6, so inventory is replaced about every 61 days (365 ÷ 6).
Answer
D · 6 times a year
6.Financial accounting
Answer: C · Recoverable amount (the higher of fair value less costs of disposal and value in use)
Why this is the answer
If the carrying amount exceeds the recoverable amount, the difference is written off as an impairment loss.
Answer
C · Recoverable amount (the higher of fair value less costs of disposal and value in use)
7.Break-even analysis
Answer: DOL = 1.667
Operating leverage: fixed costs make profit react more strongly than sales. The degree of operating leverage DOL = contribution margin/operating profit tells you that a 1% change in sales changes profit by DOL %. It is very high just above break-even and falls as sales grow.
Total contribution margin
CM = 1 250·(23 − 15) = €10 000
Operating profit
Π = 10 000 − 4 000 = €6 000
DOL
DOL = 10 000/6 000 = 1.667
Answer
DOL = 1.667
8.Break-even analysis
Answer: MS = 23.08 %
Cost-volume-profit: each unit sold earns a contribution margin, price minus variable cost per unit. Profit = Q·(p − v) − F, where F is the fixed cost. At the break-even point profit is zero, so Q = F/(p − v).
Break-even quantity
Q = F/(p − v) = 4 000/5 = 800
Margin of safety
MS = (1 040 − 800)/1 040·100 = 23.08%
Answer
MS = 23.08%
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