Break-Even Analysis

Break-Even Analysis

1. Things we need to calculate the break-even point

   • Fixed Costs
     • Costs that do not change with output
     • Examples: Rent Business Rates Taxes Insurance Management Salaries
   • Variable Costs
     • Costs that change with output
     • Examples: Raw Materials Wages Distribution Phone Bills Gas/Electricity Bill
   • Total Revenue
     • The total amount of money a business makes by selling products or services.

2. Basics

   • What it tells us
     • The break-even point informs the business how many products they need to sell so their total revenue equals the total costs.
   • How we work it out
     • Chart
       • Table
         • 1. This is done by first working out the fixed and variable cost at each unit of output
           • 2. Then you fill in what the revenue is at each stage and add up the costs.
       • On the chart you mark on the fixed and variable cost with the total costs and revenue
         • The Break-Even point is the point where the total costs and revenue lines cross
       • Behind the Break-Even Point is the Level of Loss and above is the margin of safety (level of profit)
     • Formula
       • Fixed Costs / Contribution
       • Contribution = Selling price per unit - Variable Cost per unit
       • Predicted Profit: (Output*Contribution) - Fixed Costs
       • Margin of Safety: Output - Break-Even Point
         • The number of products that a business can sell and still be safe

3. Benefits

   • Calculate the amount of sales they need before-hand
   • See how changes in output, price and costs affect the BEP and profit
   • Help set targets, especially sole traders in times of recession

4. Limitations

   • Poor Quality = Inaccurate Data
   • Assumes all output is sold = No stocks held
   • Cannot deal with sudden increases in prices and technology changes
   • Difficult for multi-product businesses, hard to allocate fixed costs
   • Ignores purchasing economic sales

5. Benefits of using ICT

   • Quicker
     • Calculations done automatically
       • It saves time so the business has time for other tasks
       • Changes are easy
       • It can be sent to other businesses

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