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
What is the usual order of stages in the consumer buying decision process?
- AEvaluation of alternatives, need recognition, information search, purchase, post-purchase behaviour
- BNeed recognition, information search, evaluation of alternatives, purchase, post-purchase behaviour
- CInformation search, need recognition, purchase, evaluation of alternatives, post-purchase behaviour
- DPurchase, need recognition, information search, evaluation of alternatives, post-purchase behaviour
2.Marketing principlesHard
A survey asks: "Don't you agree that our excellent staff are very helpful?" What is the main problem?
- AIt is too short to be understood
- BIt asks about two unrelated products
- CIt is an open question that is hard to analyse
- DIt is a leading question that pushes respondents towards agreement
3.Economics conceptsMedium
The marginal propensity to consume is:
- AThe interest rate on consumer loans
- BThe share of an extra euro of income that is spent on consumption
- CThe average share of total income that households save over a year
- DThe total consumption in an economy
4.Economics conceptsHard
In the Solow growth model, sustained long-run growth in output per worker comes from:
- ATechnological progress
- BPopulation growth
- CA higher saving rate alone
- DGovernment budget deficits
5.Financial accountingMedium
A company finds that a machine will last 8 years instead of the 5 originally estimated. Under IAS 8, how is this change applied?
- ABy changing the original cost of the machine
- BProspectively, by spreading the remaining carrying amount over the new remaining life
- CBy recognising a large gain in the current year
- DRetrospectively, by restating all prior years
6.Financial accountingHard
Under the IAS 16 revaluation model, a building is revalued upwards for the first time. Where does the gain go?
- ATo other comprehensive income and a revaluation surplus in equity
- BTo a provision on the balance sheet
- CTo retained earnings as a realised profit
- DTo revenue in the income statement
7.Break-even analysisMedium
A product sells for €28 per unit with a variable cost of €20 per unit. Fixed costs are €6 400 per month. How many units Q must be sold per month to make a profit of €2 000?
F = €6 400p = €28v = €20profit = €2 000
Q = units
8.Break-even analysisHard
A company sells 630 units per month at €26 each, with a variable cost of €20 per unit and fixed costs of €3 000 per month. The variable cost rises by €3 per unit and the price stays the same. How many units Q must now be sold per month to keep the same profit?
Q = 630p = €26v = €20 → €23F = €3 000
Q = units
3Solutions
1.Marketing principles
Answer: B · Need recognition, information search, evaluation of alternatives, purchase, post-purchase behaviour
Why this is the answer
Buyers recognise a need, look for information, compare options, buy and then judge their satisfaction. Routine purchases may skip stages.
Answer
B · Need recognition, information search, evaluation of alternatives, purchase, post-purchase behaviour
2.Marketing principles
Answer: D · It is a leading question that pushes respondents towards agreement
Why this is the answer
Leading questions bias answers through wording. A neutral version would be "How helpful were our staff?" with a balanced rating scale.
Answer
D · It is a leading question that pushes respondents towards agreement
3.Economics concepts
Answer: B · The share of an extra euro of income that is spent on consumption
Why this is the answer
The MPC measures how consumption changes with income; it determines the size of the Keynesian multiplier, 1/(1 − MPC).
Answer
B · The share of an extra euro of income that is spent on consumption
4.Economics concepts
Answer: A · Technological progress
Why this is the answer
A higher saving rate raises the steady-state level of output per worker but not its long-run growth rate; only technological progress produces continuous growth.
Answer
A · Technological progress
5.Financial accounting
Answer: B · Prospectively, by spreading the remaining carrying amount over the new remaining life
Why this is the answer
Changes in estimates affect the current and future periods only. Prior-period restatement is for changes in policy and corrections of errors.
Answer
B · Prospectively, by spreading the remaining carrying amount over the new remaining life
6.Financial accounting
Answer: A · To other comprehensive income and a revaluation surplus in equity
Why this is the answer
Upward revaluations are credited to a revaluation surplus via OCI, unless they reverse an earlier decrease recognised in profit or loss.
Answer
A · To other comprehensive income and a revaluation surplus in equity
7.Break-even analysis
Answer: Q = 1050 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 = 28 − 20 = €8
Units for the target profit
Q = (F + profit)/(p − v) = (6 400 + 2 000)/8 = 1 050
Answer
Q = 1 050 units
8.Break-even analysis
Answer: Q = 1260 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).
Current profit
Π = 630·(26 − 20) − 3 000 = €780
New contribution margin per unit
26 − 23 = €3
Units for the same profit
Q = (3 000 + 780)/3 = 1 260
Answer
Q = 1 260 units
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