Practice Flashcards
Break-even output = the ___ of units at BEP
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5.5.125 cards
Break-even output = the ___ of units at BEP
Number — how many units must be sold to cover all costs.
Number
What are fixed costs?
Costs that stay the same regardless of output — rent, insurance, salaries, loan repayments.
Same regardless of output
What is the break-even point?
Where total revenue exactly equals total costs — no profit, no loss.
TR = TC
Total revenue formula?
TR = Selling price × Quantity sold.
Price × quantity
BEP = where TR = TC (no ___, no ___)
Profit; loss.
Profit + loss
What is contribution per unit?
Selling price minus variable cost per unit — what each unit contributes toward fixed costs.
Price − VC per unit
What are variable costs?
Costs that change with output — raw materials, packaging, direct labour per unit.
Change with output
FC stay the same. VC change with ___
Output — more units = more variable costs.
Output
Why does break-even matter?
Tells how many units must be sold to avoid a loss; helps planning; useful for business plans; evaluates price/cost changes.
Min sales + planning + evaluation
What is the margin of safety?
Actual sales minus break-even sales — the buffer before losses start.
Actual − BEP
Below break-even = ___. Above break-even = ___
Below = loss. Above = profit.
Loss vs profit
TC = FC + VC. Contribution = price − ___
Variable cost per unit.
VC per unit
Total costs formula?
TC = Fixed costs + Variable costs.
FC + VC
Total contribution formula?
Total contribution = Contribution per unit × Number of units sold.
CPU × units
Don't confuse contribution with profit! Contribution = ___. Profit = ___
Contribution = price − VC per unit. Profit = TR − ALL costs (FC + VC).
Per unit vs total
At break-even: Total Revenue = ___
Total Costs — exactly covering all costs, zero profit.
Total Costs
Fixed costs must be paid even if output is ___
Zero — rent and salaries are due whether or not anything is produced.
Zero
Once total contribution covers all fixed costs, you've hit ___
Break-even! After that point, each extra unit sold generates profit.
Break-even
Profit only exists ___ break-even
Above — below break-even, the business makes a loss.
Above
Margin of safety = actual sales − ___
Break-even sales.
BEP sales
Price $10, VC $6. Contribution per unit = ___. FC $2000. BEP = ___
Contribution = $4. BEP = $2000 ÷ $4 = 500 units.
$4; 500 units
On a graph: FC = horizontal line. VC starts at ___ and slopes ___
Origin (0,0); upwards — more output = more variable costs.
Origin + upwards
Break-even helps new businesses because ___
It shows investors/banks the minimum sales needed — essential for business plans.
Business plan tool
Quick: Contribution is the ___ to break-even
Building block — each unit's contribution chips away at fixed costs.
Building block
A loss occurs when ___
Total costs exceed total revenue — the business hasn't sold enough to cover costs.
TC > TR
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Profit zone on a break-even chart = area where ___
TR is ABOVE TC — to the right of BEP.
TR above TC
Break-even chart questions are typically worth ___ marks
4 marks: labelled axes (1), correct TR (1), correct TC (1), BEP identified (1).
4 marks
What is a break-even chart?
A graph showing TC and TR at different output levels — BEP is where the lines cross.
TC + TR graph
Step 1 of drawing a break-even chart?
Draw and label axes — x-axis = output (units), y-axis = costs/revenue ($).
Label axes
Break-even chart shows TC and TR at different ___
Output levels — visual way to see BEP, profit/loss zones and margin of safety.
Output levels
If question says 'to scale' but you don't draw to scale, max = ___
Usually 2 out of 4 — scale matters for accuracy marks.
2 out of 4
TC line starts at ___ and slopes ___
Fixed costs level (not zero); upward — because VC adds to FC as output increases.
FC level + upward
Loss zone on a break-even chart = area where ___
TC is ABOVE TR — to the left of BEP.
TC above TR
Why draw a break-even chart?
Visual way to see profit/loss zones, margin of safety, and impact of cost/price changes.
Visual planning tool
TC starts at ___; TR starts at ___
TC at fixed costs level; TR at the origin.
FC level; origin
Always label axes, lines and ___
BEP — four marks typically available for a well-drawn chart.
BEP
On a break-even chart, x-axis = ___; y-axis = ___
X = output (units); Y = costs/revenue ($).
Units; $
TR line starts at ___ and slopes ___
Origin (0,0); upward — zero sales = zero revenue.
Origin + upward
To find profit at any output from the chart:
Read TR and TC at that point, then profit = TR − TC.
TR minus TC at that point
Use a ___ for neat, accurate lines
Ruler — makes it easier for the examiner to award marks.
Ruler
Common chart mistakes that lose marks?
Forgetting to label axes, not starting TC at FC level, not drawing to scale.
Labels + TC start + scale
Break-even output: read ___ from BEP to the ___
Down; x-axis — gives the number of units.
Down to x-axis
BEP on the chart is where ___
TC and TR lines cross — read down to x-axis for break-even output.
Lines cross
Draw to scale if asked — otherwise max ___
2 marks out of 4.
2/4
Four things to always label on a break-even chart?
Axes, TR line, TC line, BEP.
Axes + TR + TC + BEP
Quick: Profit zone = right of BEP. Loss zone = ___
Left of BEP.
Left
After drawing TC and TR, mark the ___ where they cross
Break-even point — and label it clearly.
BEP
Quick: BEP = where ___ and ___ lines cross
TC and TR.
TC + TR
Break-even chart shows margin of safety as ___
Distance along x-axis between BEP and actual output.
Gap on x-axis
Margin of safety on chart = distance between ___ and ___
BEP and actual output on the x-axis.
BEP to actual
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Target profit output formula?
Output = (Fixed costs + Target profit) ÷ Contribution per unit.
(FC + target) ÷ CPU
Margin of safety formula?
MoS = Actual (or estimated) sales − Break-even output.
Actual − BEP
BEP = FC ÷ ___
Contribution per unit (price − VC per unit).
CPU
Break-even output formula?
BEP = Fixed costs ÷ Contribution per unit.
FC ÷ CPU
Profit formula (two versions)?
Profit = TR − TC. OR: Profit = Total contribution − Fixed costs.
TR−TC or TotContrib−FC
FC $20k, target profit $10k, CPU $20. Output needed?
($20k + $10k) ÷ $20 = 1,500 units.
1,500 units
FC $20k, price $50, VC $30. BEP?
CPU = $50−$30 = $20. BEP = $20,000 ÷ $20 = 1,000 units.
1,000 units
BEP 1000, actual sales 1500. MoS = ___
1500 − 1000 = 500 units — sales could drop by 500 before losses start.
500 units
1500 units × $50, VC $30, FC $20k. Profit?
TR=$75k. TVC=$45k. TC=$65k. Profit=$75k−$65k = $10,000.
$10,000
MoS = actual sales − ___
Break-even output.
BEP
A small margin of safety is ___ because ___
Risky — a small drop in sales could push the business into a loss.
Risky + vulnerable
Profit = TR − TC, or Total contribution − ___
Fixed costs.
FC
Always show your working because ___
Even if the final number is wrong, you can earn method marks.
Method marks
Target price questions require you to ___
Work backwards: total costs + target profit = required revenue. Then price = revenue ÷ units.
Work backwards
Shortcut profit method?
CPU ($20) × units (1500) = $30k contribution − FC ($20k) = $10k profit. Same answer!
Contribution shortcut
A large margin of safety means ___
Comfortable buffer — the business can absorb a significant sales drop and still profit.
Comfortable buffer
Target output = (FC + target profit) ÷ ___
Contribution per unit.
CPU
Loss occurs when ___
Total costs exceed total revenue — business sold below break-even.
TC > TR
Required price = (TC + target profit) ÷ ___
Number of units expected to be sold.
Units
Contribution per unit formula?
CPU = Selling price − Variable cost per unit.
Price − VC
MoS tells you how far sales can ___ before ___
Drop; the business starts making a loss.
Drop; loss
BEP tells you the ___ number of units to sell to cover ___
Minimum; all costs (both fixed and variable).
Minimum; all costs
Negative profit means ___
A loss — the business needs to sell more, cut costs or raise prices.
Loss
Target questions test your ability to ___
Read carefully, identify what you know and need to find, then work step by step.
Step by step
Quick: ALWAYS show working for ___ marks
Method marks — partial credit even if final answer is wrong.
Method
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FC increase → TC line shifts ___. BEP ___
UP (parallel). BEP increases — need to sell more.
Up + BEP increases
Price increase → TR line becomes ___. BEP ___
Steeper (more revenue per unit). BEP decreases. But may lose customers!
Steeper + BEP down
Name three limitations of break-even analysis
Assumes all output sold, assumes costs purely fixed/variable, assumes constant price, single product only, static model.
All sold + pure costs + one price + one product
FC up → TC shifts UP → BEP ___
Increases.
Increases
VC up → TC STEEPER → BEP ___
Increases.
Increases
Price decrease → TR line becomes ___. BEP ___
Flatter (less revenue per unit). BEP increases. But may attract more customers!
Flatter + BEP up
VC increase → TC line becomes ___. BEP ___
Steeper (starts same, rises faster). BEP increases — contribution falls.
Steeper + BEP increases
Why is 'assumes all output is sold' a limitation?
In reality, not everything sells — unsold stock means actual revenue is lower than predicted.
Unsold stock
Price up → TR STEEPER → BEP ___
Decreases.
Decreases
Price up → BEP down. Price down → BEP ___
Up — lower contribution per unit means more units needed to break even.
Up
Why is 'single product only' a limitation?
Most businesses sell multiple products at different prices — break-even can't handle this complexity.
Multiple products
FC change = TC shifts up/down (parallel). VC change = TC changes ___
Gradient (steepness) — different effects on the chart.
Gradient
Rent goes up → which line moves? How?
TC shifts upward (parallel) — FC increased so whole line moves up.
TC shifts up
When discussing price changes, always consider ___
Both the numbers (BEP change) AND the impact on demand (customers' response).
Numbers + demand
Mentioning limitations in exams shows ___
Critical thinking — can push answers into the top mark band.
Critical thinking
Price down → TR FLATTER → BEP ___
Increases.
Increases
Break-even is a ___ model — doesn't account for ___
Static; changes over time.
Static + no time changes
Quick: Break-even limitations include assumes all sold, single product, constant ___
Prices — in reality businesses use discounts and change prices.
Prices
Price up → TR steeper → BEP lower. Price down → TR ___ → BEP ___
Flatter; higher.
Flatter + higher
Raw materials cost more → which line changes? How?
TC becomes steeper — VC per unit increased so gradient increases.
TC steeper
Topic 5.5 study notes
Full notes & explanations for Break-even analysis
BM exam skills
Paper structures, command terms & tips
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