Break even analysis

Break even analysis

1. Fixed costs

   • Costs that don't change due to output
     • Examples: Rent, wages

2. Variable costs

   • Costs that change to ouput
     • Examples: Bills, fuel

3. Break even

   • This is when the sales are exactly the same as costs
     • Formula for BEP: Fixed costs/selling price-Variable costs per unit
     • The BEP shows us how many products the business has to sell before it starts to make a profit

4. Completing the table : First fill in all of the fixed costs. They stay the same throughout.

   • Now fill in the variable costs (selling price x items sold)
     • Next work out the total revenue (quantity sold x selling price)
       • Finally calculate the total costs (variable + fixed costs)

5. Plotting the graph

   • First draw the fixed costs line
     • Then the variable costs line (plot all points on graph first)
       • Now plot the total sales
         • To find the break even point, look and find where the variable costs line crosses the total sales line

6. Benefits of BEP

   • It helps set a aim for business
     • Good way to see how changes in output will change profit
   • Limitations are that any wrong calculations will lead to a wrong BEP