Break Even Analysis + ARR

Question 1

Advantages of break even analysis

Answer 1

-easy to work out
-it’s quick, a business can take immediate action
-can help a business predict the effects of a change in sales
-can be used to persuade a bank to give a loan
-can deter businesses from releasing products which might be difficult to sell

Question 2

Disadvantages of break even analysis

Answer 2

-assumes that a product will sell at it’s current price
-leaves out cost of potential waste from not selling products
-can be complicated if it involves more than one product
-only shows how much needs to sell, not how much will

Question 3

Break even analysis

Answer 3

X axis: no. of units sold
Y axis: costs
Fixed costs will be a straight line, variable costs will be a diagonal line parallel with total costs
Break even point is where revenue exceeds total costs
Margin of safety is the gap between the break even point and the volume sold on the x axis

Question 4

ARR

Answer 4

Average Rate of Return: compares the average yearly profit from an investment as is stated by a percentage

Question 5

Calculating ARR

Answer 5

Step 1: calculate average yearly profit

Total profits/number of years = average yearly profit

Step 2: calculate ARR

Average yearly profit*100/cost of investment = ARR