Break Even Analysis

Question 1

Break Even Analysis

Answer 1

Identifies the point at which a business’s costs are matched by the money it receive from sales

Total Revenue (TR) = Total Costs (TC)

Below this point the business is losing money and above this point the business is making a profit

Question 2

Evaluation Of Break Even Analysis

Answer 2

+ Valuable management tool used to plan, monitor, control and set targets
+ Easy way to calculate profit or loss at different levels of output
+ Identifies fixed and variable costs

• Does not take account of variations in costs or selling price
• Forecast sales may not be achieved
• Targets set may be too high, creating stress

Question 3

Planning

Answer 3

Break even helps a business to work out how many items it needs to sell over a certain period to cover its costs

• Set budgets for the amount of sales necessary and costs
• Informs pricing decisions
• Forms part of a business plan to show at what point the business will start to make a profit

Question 4

Monitoring

Answer 4

Break even alerts the business to potential problems e.g. increased fixed costs or a fall in sales

• Monitor progress towards achieving break-even point
• Identify changes to selling price of costs
• Take corrective action if targets look unlikely to be met

Question 5

Control

Answer 5

Break even can be used to identify where costs are increasing

• Keep costs within budget
• Motivate employees
• Manage sales accounts

Question 6

Target Setting

Answer 6

Break even helps a business to set targets for sales, unit costs, contribution and profit

• Set sales targets for individual employees, teams or products
• Set expenditure budgets
• Set profit budgets based upon sales targets and cost targets

Question 7

Contribution

Answer 7

Contribution pays for the businesses fixed overheads (things paid out monthly) e.g. wages

+ Business is able to see whether the products it produces cover their own variable costs
+ Used to set the price of the product in relation to direct production costs

• Contributions per unit may be very low so the business will need to sell a large number to cover fixed costs
• Contribution per unit on some products may be high but not sell as much