Break Even Analysis

Fixed costs are costs that do not change no matter how much is produced.
1. Rent, Advertising, Interest payments on loans.
Variable costs are costs that change depending on the output.
1. Electricity costs, Overtime pay, Raw Materials, Maintenance of machinery.
Break Even Analysis is the point at which the sales are exactly the same as the costs.
1. Break Even Analysis shows us the Total costs, Sales Revenue and Profit.
  1. Fixed costs divided by selling price-variable costs per unit.
    1. Graphs 1.This is done by first working out the fixed and variable costs at each unit of output.
      1. Graphs 2. Then you fill in what the revenue is at each stage and add up the costs.
2. Contribution=selling price per unit-variable costs per unit.
  1. Revenue=selling price*quantity sold.
    1. Margin of safety=output-break even point.
      1. Total Costs=fixed costs + variable costs.
The break even point informs the business how many products they need to sell so their total revenue equals the total costs.
1. Spreadsheets/ICT is a good way to work out the break even point as it is a good software to produce graphs and charts, you can share it via internet and its simple to change .
Limitations-If new rivals enter the market or an economic recession starts that it can take longer to reach the break even point than anticipated.

Resource summary

	Created by jonesj@ellowes.dudle over 11 years ago