Business – 5.4 Costs – Break-even analysis | e-Consult
5.4 Costs – Break-even analysis (1 questions)
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Answer to Question 3
- Contribution per unit:
Product A: £40 – £24 = £16.
Product B: £30 – £18 = £12.
- Sales mix (total units = 3,000 + 2,000 = 5,000):
Proportion A = 3,000 ÷ 5,000 = 0.60.
Proportion B = 2,000 ÷ 5,000 = 0.40.
Weighted average contribution = (0.60 × £16) + (0.40 × £12) = £9.60 + £4.80 = £14.40 per unit.
- Break‑even total output = Fixed costs ÷ Weighted contribution = £120,000 ÷ £14.40 ≈ 8,333 units (rounded up).
- Expected total output = 5,000 units, which is below the break‑even level.
Margin of safety (units) = Expected – Break‑even = 5,000 – 8,333 = -3,333 units (i.e., a shortfall).
As a percentage of expected sales: (-3,333 ÷ 5,000) × 100 = -66.7 %. The firm would need to increase sales or reduce costs to reach profitability.
Combined break‑even chart (SVG):
Units (combined) £ Total Cost Total Revenue BE (8,333) Expected (5,000)