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
Integrated marketing communications (IMC) means:
- AMerging the marketing and finance departments
- BCoordinating all communication channels to deliver one consistent message
- CSpending the same budget on each medium
- DUsing only digital channels for advertising
2.Marketing principlesHard
An airline can buy a certain aircraft model only from one manufacturer, and switching to another model is very costly. In Porter's five forces, what does this mean?
- AHigh threat of new entrants into the market
- BHigh bargaining power of buyers
- CLow bargaining power of suppliers
- DHigh bargaining power of suppliers
3.Economics conceptsMedium
A price ceiling set below the equilibrium price typically causes:
- AA surplus
- BAn increase in supply
- CA shortage
- DNo change in the market
4.Economics conceptsHard
In the Prisoner's Dilemma, the Nash equilibrium is:
- ABoth players cooperate
- BThere is no equilibrium
- COne player cooperates and the other defects, so only one of them gains
- DBoth players defect, even though both cooperating would be better
5.Financial accountingMedium
What is the key difference between absorption costing and marginal costing?
- AMarginal costing includes all overheads in inventory; absorption costing excludes them
- BAbsorption costing ignores variable costs
- CMarginal costing is required by IFRS for external reporting
- DAbsorption costing includes fixed production overheads in inventory; marginal costing treats them as period costs
6.Financial accountingHard
Under IFRS 16, a lessee typically recognises a lease on the balance sheet as:
- AA right-of-use asset and a lease liability
- BAn operating expense only, spread evenly over the lease term
- CEquity and a provision
- DRevenue and inventory
7.Break-even analysisMedium
A product sells for €23 per unit with a variable cost of €18 per unit. Fixed costs are €10 000 per month. How many units Q must be sold per month to make a profit of €2 000?
F = €10 000p = €23v = €18profit = €2 000
Q = units
8.Break-even analysisHard
A product sells for €27 per unit, with a variable cost of €25 per unit and fixed costs of €5 000 per year. Budgeted sales are 4 000 units. Find the margin of safety MS as a percentage of budgeted sales.
F = €5 000p = €27v = €25budget = 4 000
MS = %
3Solutions
1.Marketing principles
Answer: B · Coordinating all communication channels to deliver one consistent message
Why this is the answer
IMC aligns advertising, PR, sales promotion, digital and personal selling so they reinforce each other and build a clear brand image.
Answer
B · Coordinating all communication channels to deliver one consistent message
2.Marketing principles
Answer: D · High bargaining power of suppliers
Why this is the answer
When suppliers are concentrated and switching is expensive, they can demand higher prices or better terms, reducing industry profitability.
Answer
D · High bargaining power of suppliers
3.Economics concepts
Answer: C · A shortage
Why this is the answer
A binding maximum price raises quantity demanded and lowers quantity supplied, creating excess demand, as with rent control.
Answer
C · A shortage
4.Economics concepts
Answer: D · Both players defect, even though both cooperating would be better
Why this is the answer
Each player's best response is to defect whatever the other does, so mutual defection is the equilibrium, although mutual cooperation would give both a higher payoff.
Answer
D · Both players defect, even though both cooperating would be better
5.Financial accounting
Answer: D · Absorption costing includes fixed production overheads in inventory; marginal costing treats them as period costs
Why this is the answer
Under absorption costing each unit carries a share of fixed production overhead. Marginal costing values inventory at variable cost only and expenses fixed costs in the period.
Answer
D · Absorption costing includes fixed production overheads in inventory; marginal costing treats them as period costs
6.Financial accounting
Answer: A · A right-of-use asset and a lease liability
Why this is the answer
IFRS 16 removed the operating lease distinction for lessees: they recognise a right-of-use asset and a liability for lease payments, except for short-term and low-value leases.
Answer
A · A right-of-use asset and a lease liability
7.Break-even analysis
Answer: Q = 2400 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).
Contribution margin per unit
p − v = 23 − 18 = €5
Units for the target profit
Q = (F + profit)/(p − v) = (10 000 + 2 000)/5 = 2 400
Answer
Q = 2 400 units
8.Break-even analysis
Answer: MS = 37.5 %
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) = 5 000/2 = 2 500
Margin of safety
MS = (4 000 − 2 500)/4 000·100 = 37.5%
Answer
MS = 37.5%
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