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
Positioning refers to:
- AThe order of products in a catalogue
- BHow a brand is perceived relative to competitors in customers' minds
- CWhere products are physically placed on shop shelves and in store displays
- DThe geographical location of the company
2.Marketing principlesHard
When is price skimming most suitable?
- AFor an innovative product with few rivals and early buyers willing to pay a premium
- BFor a commodity product in a crowded market
- CWhen the firm wants the largest market share at launch
- DWhen customers are very sensitive to price
3.Economics conceptsMedium
In perfect competition in the long run, firms earn:
- ALosses forever
- BLarge economic profits
- CZero economic profit
- DMonopoly profits
4.Economics conceptsHard
The "convergence hypothesis" from the Solow model predicts that:
- ARich countries always grow faster than poor ones, because they have more capital
- BPoorer countries with similar fundamentals tend to grow faster than richer ones
- CAll countries will eventually have the same population
- DExchange rates converge to a fixed value
5.Financial accountingMedium
Budgeted sales are 1,500 units and the break-even point is 1,000 units. What is the margin of safety?
- A2,500 units
- B500 units
- C1,500 units
- D1,000 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?
- AA ten-year lease of a large production machine
- BAny lease of land and buildings
- CAny lease with monthly payments
- DA lease with a term of 12 months or less
7.Break-even analysisMedium
A company sells 1 250 units at €28 each. The variable cost is €20 per unit and fixed costs are €4 000. Find the degree of operating leverage DOL at this sales level.
Q = 1 250p = €28v = €20F = €4 000
DOL =
8.Break-even analysisHard
A company sells two products. Product A sells for €17 with a variable cost of €12; product B sells for €18 with a variable cost of €10. They sell in a fixed mix of 2 units of A for every 1 of B. Fixed costs are €9 000 per month. Find the total number of units Q (A and B together) needed to break even.
pA = €17, vA = €12pB = €18, vB = €10A : B = 2 : 1F = €9 000
Q = units
3Solutions
1.Marketing principles
Answer: B · How a brand is perceived relative to competitors in customers' minds
Why this is the answer
Positioning defines the distinctive place a brand wants to occupy in the target customers' minds, based on benefits and differences from rivals.
Answer
B · How a brand is perceived relative to competitors in customers' minds
2.Marketing principles
Answer: A · For an innovative product with few rivals and early buyers willing to pay a premium
Why this is the answer
Skimming works when the product is distinctive, entry barriers protect it for a while, and some customers value being first enough to pay more.
Answer
A · For an innovative product with few rivals and early buyers willing to pay a premium
3.Economics concepts
Answer: C · Zero economic profit
Why this is the answer
Profits attract entry and losses cause exit until price equals minimum average cost and economic profit is zero.
Answer
C · Zero economic profit
4.Economics concepts
Answer: B · Poorer countries with similar fundamentals tend to grow faster than richer ones
Why this is the answer
Capital-poor economies have higher returns to investment, so, given similar saving rates and technology, they should catch up (conditional convergence).
Answer
B · Poorer countries with similar fundamentals tend to grow faster than richer ones
5.Financial accounting
Answer: B · 500 units
Why this is the answer
Margin of safety = budgeted sales − break-even sales = 500 units, or one third of budgeted sales.
Answer
B · 500 units
6.Financial accounting
Answer: D · 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
D · 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 = 1 250·(28 − 20) = €10 000
Operating profit
Π = 10 000 − 4 000 = €6 000
DOL
DOL = 10 000/6 000 = 1.667
Answer
DOL = 1.667
8.Break-even analysis
Answer: Q = 1500 units
Break-even with a sales mix: when products sell in a fixed ratio, use the weighted average contribution margin: weight each product's p − v by its share of units. Break-even units = F/(weighted contribution margin), split again in the mix ratio.
Contribution margins
cmA = €5, cmB = €8
Weighted contribution margin
(2·5 + 1·8)/3 = €6.00
Break-even units
Q = 9 000/6 = 1 500
A: 1 000, B: 500
Answer
Q = 1 500 units
ExamProblems · examproblems.com/courses/business-fundamentals