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
Psychographic segmentation divides customers by:
- APurchase frequency only
- BAge and income only
- CCountry and climate
- DLifestyle, values and personality
2.Marketing principlesHard
In conjoint analysis, researchers:
- AObserve shoppers in a store without asking questions
- BCount website visitors
- CAsk respondents to choose between product profiles to estimate the value of each attribute
- DAnalyse competitors' financial statements
3.Economics conceptsMedium
The marginal propensity to consume is:
- AThe average share of total income that households save over a year
- BThe interest rate on consumer loans
- CThe share of an extra euro of income that is spent on consumption
- DThe total consumption in an economy
4.Economics conceptsHard
According to the quantity theory of money (MV = PY), if velocity and real output are constant, a 5% rise in the money supply leads to:
- AAbout a 5% rise in the price level
- BAbout a 5% rise in real output
- CA 5% fall in velocity
- DNo change in prices
5.Financial accountingMedium
Fixed costs are €20,000, the selling price is €50 and the variable cost is €30 per unit. What is the break-even point?
- A2,000 units
- B400 units
- C1,000 units
- D667 units
6.Financial accountingHard
Under IFRS 16, which lease may a lessee choose to expense on a straight-line basis instead of recognising a right-of-use asset?
- AAny lease of land and buildings
- BA lease with a term of 12 months or less
- CA ten-year lease of a large production machine
- DAny lease with monthly payments
7.Break-even analysisMedium
A company sells 3 000 units at €36 each. The variable cost is €30 per unit and fixed costs are €7 200. Find the degree of operating leverage DOL at this sales level.
Q = 3 000p = €36v = €30F = €7 200
DOL =
8.Break-even analysisHard
A product sells for €18 per unit, with a variable cost of €12 per unit and fixed costs of €24 000 per year. Budgeted sales are 5 200 units. Find the margin of safety MS as a percentage of budgeted sales.
F = €24 000p = €18v = €12budget = 5 200
MS = %
3Solutions
1.Marketing principles
Answer: D · Lifestyle, values and personality
Why this is the answer
Psychographic segmentation looks at attitudes, interests, values and lifestyles; behavioural segmentation uses usage and loyalty.
Answer
D · Lifestyle, values and personality
2.Marketing principles
Answer: C · Ask respondents to choose between product profiles to estimate the value of each attribute
Why this is the answer
Conjoint analysis infers the part-worth utility of attributes (such as price, brand, features) from respondents' choices or rankings of combinations.
Answer
C · Ask respondents to choose between product profiles to estimate the value of each attribute
3.Economics concepts
Answer: C · 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
C · The share of an extra euro of income that is spent on consumption
4.Economics concepts
Answer: A · About a 5% rise in the price level
Why this is the answer
With V and Y constant, M and P move proportionally, so prices rise about 5%. This is the classical view of money neutrality in the long run.
Answer
A · About a 5% rise in the price level
5.Financial accounting
Answer: C · 1,000 units
Why this is the answer
Contribution per unit = €50 − €30 = €20. Break-even = €20,000 ÷ €20 = 1,000 units.
Answer
C · 1,000 units
6.Financial accounting
Answer: B · A lease with a term of 12 months or less
Why this is the answer
Lessees may elect not to recognise short-term leases (12 months or less) and leases of low-value assets, expensing the payments instead.
Answer
B · A lease with a term of 12 months or less
7.Break-even analysis
Answer: DOL = 1.667
Operating leverage: fixed costs make profit react more strongly than sales. The degree of operating leverage DOL = contribution margin/operating profit tells you that a 1% change in sales changes profit by DOL %. It is very high just above break-even and falls as sales grow.
Total contribution margin
CM = 3 000·(36 − 30) = €18 000
Operating profit
Π = 18 000 − 7 200 = €10 800
DOL
DOL = 18 000/10 800 = 1.667
Answer
DOL = 1.667
8.Break-even analysis
Answer: MS = 23.08 %
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) = 24 000/6 = 4 000
Margin of safety
MS = (5 200 − 4 000)/5 200·100 = 23.08%
Answer
MS = 23.08%
ExamProblems · examproblems.com/courses/business-fundamentals