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
Which of these is one of Porter's five competitive forces?
- AThe firm's brand awareness
- BThe political stability of a country
- CThe level of inflation
- DThe threat of substitute products
2.Marketing principlesHard
A manufacturer starts selling online directly to consumers at lower prices than its retailers. Retailers complain. What is this?
- AHorizontal channel conflict
- BCannibalisation by a rival brand
- CVertical channel conflict
- DA pull strategy
3.Economics conceptsMedium
A country imposes a tariff on imported steel. Which effect is most likely?
- ADomestic consumers gain surplus
- BDomestic steel prices rise and domestic production increases
- CDomestic steel prices fall and imports rise
- DThe world price of steel rises sharply for all countries that trade it
4.Economics conceptsHard
The Lerner index (P − MC)/P for a profit-maximising monopolist equals 1/|PED|. If |PED| = 4, the price is:
- A75% above marginal cost, as a share of price
- B25% above marginal cost, as a share of price
- C4 times marginal cost
- DEqual to marginal cost
5.Financial accountingMedium
Which inventory valuation method assumes the oldest goods are sold first?
- AWeighted average cost
- BSpecific identification of each item
- CFIFO (first in, first out)
- DLIFO (last in, first out)
6.Financial accountingHard
Over three years a company reports rising profits while operating cash flow keeps falling. What should an analyst suspect?
- AThe company must have repaid all its loans
- BProfits may be driven by aggressive accruals, such as rising receivables or capitalised costs
- CDepreciation must have been too high
- DThe company has very high earnings quality
7.Break-even analysisMedium
A product can be made in two ways. Method A has fixed costs of €30 000 per year and a variable cost of €25 per unit. Method B, more automated, has fixed costs of €36 000 per year and a variable cost of €21 per unit. At what yearly volume Q do both methods cost the same?
FA = €30 000vA = €25FB = €36 000vB = €21
Q = units
8.Break-even analysisHard
A product sells for €14 per unit, with a variable cost of €6 per unit and fixed costs of €20 000 per year. Budgeted sales are 2 880 units. Find the margin of safety MS as a percentage of budgeted sales.
F = €20 000p = €14v = €6budget = 2 880
MS = %
3Solutions
1.Marketing principles
Answer: D · The threat of substitute products
Why this is the answer
The five forces are rivalry among competitors, threat of new entrants, threat of substitutes, and the bargaining power of buyers and of suppliers.
Answer
D · The threat of substitute products
2.Marketing principles
Answer: C · Vertical channel conflict
Why this is the answer
Vertical conflict arises between levels, such as manufacturer and retailer. Horizontal conflict is between firms at the same level, such as two retailers.
Answer
C · Vertical channel conflict
3.Economics concepts
Answer: B · Domestic steel prices rise and domestic production increases
Why this is the answer
The tariff raises the domestic price, increasing domestic output and government revenue but reducing consumer surplus and creating deadweight losses.
Answer
B · Domestic steel prices rise and domestic production increases
4.Economics concepts
Answer: B · 25% above marginal cost, as a share of price
Why this is the answer
The markup (P − MC)/P = 1/4 = 0.25, so a quarter of the price is a margin above MC; more elastic demand means less market power.
Answer
B · 25% above marginal cost, as a share of price
5.Financial accounting
Answer: C · FIFO (first in, first out)
Why this is the answer
Under FIFO, cost of sales uses the oldest costs and closing inventory reflects recent costs. IFRS does not allow LIFO.
Answer
C · FIFO (first in, first out)
6.Financial accounting
Answer: B · Profits may be driven by aggressive accruals, such as rising receivables or capitalised costs
Why this is the answer
A widening gap between profit and operating cash flow often signals working capital build-up or aggressive recognition, suggesting low earnings quality.
Answer
B · Profits may be driven by aggressive accruals, such as rising receivables or capitalised costs
7.Break-even analysis
Answer: Q = 1500 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
30 000 + 25Q = 36 000 + 21Q
Solve for Q
Q = (36 000 − 30 000)/(25 − 21) = 1 500
Answer
Q = 1 500 units
Below this volume method A is cheaper; above it the automated method B is cheaper.
8.Break-even analysis
Answer: MS = 13.19 %
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) = 20 000/8 = 2 500
Margin of safety
MS = (2 880 − 2 500)/2 880·100 = 13.19%
Answer
MS = 13.19%
ExamProblems · examproblems.com/courses/business-fundamentals