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
Content marketing mainly aims to:
- AReduce product prices for loyal customers
- BAttract and keep an audience by offering useful or entertaining content
- CInterrupt viewers with as many adverts as possible
- DReplace all customer service with chatbots
2.Marketing principlesHard
Research shows young consumers see a long-established brand as old-fashioned, although product quality is good. What is the most suitable strategy?
- AWithdrawing the product immediately
- BCutting the price to the lowest in the market
- CChanging the distribution to exclusive dealers only
- DRepositioning the brand through new communication and image
3.Economics conceptsMedium
The income elasticity of demand for a good is -0.4. The good is:
- AA complement
- BA luxury good
- CAn inferior good
- DA normal necessity
4.Economics conceptsHard
Under a fixed exchange rate with free capital movement, a country:
- AMust have a budget surplus
- BCan set any interest rate it likes
- CCannot trade with other countries
- DLoses control of independent monetary policy
5.Financial accountingMedium
A company pays its insurance for next year in advance. How is the payment recorded at the year end?
- AAs revenue
- BAs a prepaid expense (asset)
- CAs an expense of the current year in full
- DAs a liability
6.Financial accountingHard
Inventory days are 60, receivable days 45 and payable days 30. What is the cash conversion (operating) cycle?
- A15 days
- B75 days
- C105 days
- D135 days
7.Break-even analysisMedium
A product can be made in two ways. Method A has fixed costs of €20 000 per year and a variable cost of €10 per unit. Method B, more automated, has fixed costs of €23 000 per year and a variable cost of €4 per unit. At what yearly volume Q do both methods cost the same?
FA = €20 000vA = €10FB = €23 000vB = €4
Q = units
8.Break-even analysisHard
A product sells for €23 per unit, with a variable cost of €15 per unit and fixed costs of €16 000 per year. Budgeted sales are 3 000 units. Find the margin of safety MS as a percentage of budgeted sales.
F = €16 000p = €23v = €15budget = 3 000
MS = %
3Solutions
1.Marketing principles
Answer: B · Attract and keep an audience by offering useful or entertaining content
Why this is the answer
Content marketing provides value first, such as guides, videos or articles. It builds trust and search visibility, leading to sales over time.
Answer
B · Attract and keep an audience by offering useful or entertaining content
2.Marketing principles
Answer: D · Repositioning the brand through new communication and image
Why this is the answer
Repositioning changes how the target segment sees the brand, for example with updated design, new messages and channels the younger audience uses.
Answer
D · Repositioning the brand through new communication and image
3.Economics concepts
Answer: C · An inferior good
Why this is the answer
A negative income elasticity means demand falls as income rises, which defines an inferior good; luxuries have income elasticity above 1.
Answer
C · An inferior good
4.Economics concepts
Answer: D · Loses control of independent monetary policy
Why this is the answer
A country cannot simultaneously have a fixed exchange rate, free capital flows and an independent monetary policy; it must give up one of the three.
Answer
D · Loses control of independent monetary policy
5.Financial accounting
Answer: B · As a prepaid expense (asset)
Why this is the answer
The unused part of the payment is an asset (prepayment) and becomes an expense in the period it covers.
Answer
B · As a prepaid expense (asset)
6.Financial accounting
Answer: B · 75 days
Why this is the answer
60 + 45 − 30 = 75 days between paying suppliers and collecting cash from customers. A shorter cycle needs less working capital finance.
Answer
B · 75 days
7.Break-even analysis
Answer: Q = 500 units
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).
Equal total costs
20 000 + 10Q = 23 000 + 4Q
Solve for Q
Q = (23 000 − 20 000)/(10 − 4) = 500
Answer
Q = 500 units
Below this volume method A is cheaper; above it the automated method B is cheaper.
8.Break-even analysis
Answer: MS = 33.33 %
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) = 16 000/8 = 2 000
Margin of safety
MS = (3 000 − 2 000)/3 000·100 = 33.33%
Answer
MS = 33.33%
ExamProblems · examproblems.com/courses/business-fundamentals