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
Value-based pricing sets prices mainly according to:
- AThe prices charged by the cheapest rival
- BThe firm's target profit for the year
- CCustomers' perception of the product's value
- DThe cost of making the product plus a mark-up
2.Marketing principlesHard
In conjoint analysis, researchers:
- AAsk respondents to choose between product profiles to estimate the value of each attribute
- BAnalyse competitors' financial statements
- CCount website visitors
- DObserve shoppers in a store without asking questions
3.Economics conceptsMedium
A currency depreciation tends to:
- AMake exports cheaper abroad and imports more expensive
- BHave no effect on trade
- CMake imports cheaper
- DReduce the price of all domestic goods and make imports cheaper
4.Economics conceptsHard
The Phillips curve originally suggested:
- AA trade-off between inflation and unemployment in the short run
- BThat higher taxes always reduce inflation
- CThat unemployment has no link to inflation
- DThat inflation and unemployment always rise and fall together in the short run
5.Financial accountingMedium
A company increases its allowance for doubtful receivables. What is the effect?
- AAn expense is recognised and net receivables fall
- BRevenue increases and gross receivables rise by the same amount
- COnly the notes change; no figures move
- DCash decreases immediately
6.Financial accountingHard
A firm has a net profit margin of 5%, asset turnover of 2 and an equity multiplier (assets ÷ equity) of 1.5. Using the DuPont analysis, what is ROE?
- A8.5%
- B10%
- C15%
- D7.5%
7.Break-even analysisMedium
A product sells for €21 per unit with a variable cost of €6 per unit. Fixed costs are €30 000 per month. How many units Q must be sold per month to make a profit of €6 000?
F = €30 000p = €21v = €6profit = €6 000
Q = units
8.Break-even analysisHard
A product sells for €33 per unit, with a variable cost of €25 per unit and fixed costs of €32 000 per year. Budgeted sales are 6 000 units. Find the margin of safety MS as a percentage of budgeted sales.
F = €32 000p = €33v = €25budget = 6 000
MS = %
3Solutions
1.Marketing principles
Answer: C · Customers' perception of the product's value
Why this is the answer
Value-based pricing estimates what the offer is worth to buyers. Costs then set a floor, and competitor prices are a reference.
Answer
C · Customers' perception of the product's value
2.Marketing principles
Answer: A · 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
A · Ask respondents to choose between product profiles to estimate the value of each attribute
3.Economics concepts
Answer: A · Make exports cheaper abroad and imports more expensive
Why this is the answer
A weaker currency improves export competitiveness and raises import prices, which can increase inflation.
Answer
A · Make exports cheaper abroad and imports more expensive
4.Economics concepts
Answer: A · A trade-off between inflation and unemployment in the short run
Why this is the answer
Phillips found an inverse relationship between wage inflation and unemployment; expectations-augmented versions show no long-run trade-off at the natural rate.
Answer
A · A trade-off between inflation and unemployment in the short run
5.Financial accounting
Answer: A · An expense is recognised and net receivables fall
Why this is the answer
The increase is charged to profit, and the allowance is deducted from gross receivables, so the balance sheet shows the amount expected to be collected.
Answer
A · An expense is recognised and net receivables fall
6.Financial accounting
Answer: C · 15%
Why this is the answer
ROE = 5% × 2 × 1.5 = 15%. DuPont shows whether returns come from profitability, asset efficiency or leverage.
Answer
C · 15%
7.Break-even analysis
Answer: Q = 2400 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 = 21 − 6 = €15
Units for the target profit
Q = (F + profit)/(p − v) = (30 000 + 6 000)/15 = 2 400
Answer
Q = 2 400 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) = 32 000/8 = 4 000
Margin of safety
MS = (6 000 − 4 000)/6 000·100 = 33.33%
Answer
MS = 33.33%
ExamProblems · examproblems.com/courses/business-fundamentals