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 company publishes articles on its own blog. In the paid, owned and earned media model, this is:
- AShared paid media
- BOwned media
- CPaid media
- DEarned media
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?
- APrice skimming
- BCaptive product pricing
- CPrestige pricing
- DPenetration pricing
3.Economics conceptsMedium
Crowding out refers to:
- AToo many firms entering a market
- BHigher government borrowing raising interest rates and reducing private investment
- CImports replacing domestic production
- DOvercrowded public services
4.Economics conceptsHard
In Spence's job market signalling model, education can be valuable to employers even if it does not raise productivity because:
- AEmployers are required by law to hire graduates
- BIt guarantees that every graduate is highly productive
- CIt reduces the wages employers must pay
- DIt is less costly for high-ability workers to acquire, so it reveals their type
5.Financial accountingMedium
Current assets are €300,000 and current liabilities are €150,000. What is the current ratio?
- A1.5
- B0.5
- C2.0
- D4.5
6.Financial accountingHard
A company changes its inventory method from weighted average to FIFO because it gives more relevant information. Under IAS 8, how is this applied?
- AIt is not allowed to change inventory methods
- BBy recognising the whole effect as income this year
- CProspectively, from the date of the change only
- DRetrospectively, restating comparative figures as if FIFO had always been used
7.Break-even analysisMedium
A product sells for €32 with a variable cost of €30 per unit. Fixed costs are €5 000 per month and profit is taxed at 20%. How many units Q must be sold per month to earn €2 000 after tax?
p = €32v = €30F = €5 000T = 20%after-tax profit = €2 000
Q = units
8.Break-even analysisHard
A product sells for €28 per unit, with a variable cost of €20 per unit and fixed costs of €9 600 per year. Budgeted sales are 1 800 units. Find the margin of safety MS as a percentage of budgeted sales.
F = €9 600p = €28v = €20budget = 1 800
MS = %
3Solutions
1.Marketing principles
Answer: B · Owned media
Why this is the answer
Owned media are channels the brand controls, such as its website and blog. Paid media are bought ads; earned media are free coverage, shares and reviews.
Answer
B · Owned media
2.Marketing principles
Answer: D · 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
D · 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: D · It is less costly for high-ability workers to acquire, so it reveals their type
Why this is the answer
If acquiring education costs less for able workers, only they find it worth getting, so it separates types and solves the hidden information problem.
Answer
D · It is less costly for high-ability workers to acquire, so it reveals their type
5.Financial accounting
Answer: C · 2.0
Why this is the answer
€300,000 ÷ €150,000 = 2.0, so current assets cover short-term obligations twice.
Answer
C · 2.0
6.Financial accounting
Answer: D · Retrospectively, restating comparative figures as if FIFO had always been used
Why this is the answer
Voluntary policy changes are applied retrospectively where practicable, so comparatives remain consistent. Changes in estimates, by contrast, are applied prospectively.
Answer
D · Retrospectively, restating comparative figures as if FIFO had always been used
7.Break-even analysis
Answer: Q = 3750 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).
Pre-tax profit needed
2 000/(1 − 0.2) = €2 500
Units needed
Q = (5 000 + 2 500)/2 = 3 750
Answer
Q = 3 750 units
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) = 9 600/8 = 1 200
Margin of safety
MS = (1 800 − 1 200)/1 800·100 = 33.33%
Answer
MS = 33.33%
ExamProblems · examproblems.com/courses/business-fundamentals