Break Even Analysis

Break Even Analysis

1. things I need to know before I do a break even analysis

   • costs
     • fixed costs: costs that do not change with output
     • variable costs: costs that changes with output
   • revenue
     • the amount of money business received for selling their products or provides services
   • contribution
     • selling price- variable costs
   • margin of safety
     • total output -breakeven point
   • break even point
     • break-even point of production is the level of output at which total costs equal total revenue
       • break-even formula: fixed costs/ contribution

2. the uses and limitations of break even analysis

   • uses:• Calculate in advance the level of sales needed to break-even • See how changes in output affect profit • See how changes in price affect BEP and profit • See how changes in costs affect BEF and profit • Help set targets for survival – important for Sole Traders and in times of recession.
   • limitations:• It assumes all output is sold and no stocks are held. • Cannot cope with a sudden increase in wages and prices or changes in technology. • Poor quality data can result in inaccurate conclusions being drawn • Ignores purchasing economies of scale • Less useful for multi-product businesses because allocating fixed costs in different products might be inaccurate.

3. break even chart

   • need include: fixed costs, variable costs, total costs and total revenue.
     • margin of safety
     • break even point is where the line of total revenue crossed with the line of total costs (where revenue is equal to costs )
     • this tell business the amount of product they need to make to make their total revenue cover their total costs, a low break even point is usually good.

4. the advantage of using ICT to do break even analysis

   • quicker and easier
     • the break even calculations done by computer once you type in the formula
     • the information can be spread quickly on internet

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