Break-even analysis

Question 1

What does a break-even chart show?

Answer 1

• how many unit a business needs to sell to cover its costs.
• when a business will make a profit
• lowest number of sales needed to prevent loss
• size of margin of safety
• Can help a business decide how much it should sell its products for

Question 2

If break-even point is too high…

Answer 2

• business will have to sell a lot too make a profit.
• could try to lower its break-even point to increase profits
  They can do this by increasing the price of their product or decreasing costs by using cheaper suppliers.

Question 3

What are the risks of not analysing break even?

Answer 3

• business wont know how many products it has to sell to break even
• won’t know the number of units it needs to sell to prevent loss
• won’t know its margin of safety.

Question 4

What are the risks for pricing a product without analysing break even?

Answer 4

1. won’t know whether products are priced too high or too low.
   - too low =need to sell more units to BE– risk of making loss.
2. Sale price of product changes, business will not know if it is making a profit or loss.

Question 5

What are the risks for a businesses cost without analysing the break-even point?

Answer 5

1. won’t know whether costs are reasonable
   - more money could be spent on making the product then there is being sold.
2. cost of product change = business won’t know whether it will be able to make a profit or loss.