breakeven

Question 1

What does breakeven mean

Answer 1

A business will always want to know how many products (or services) they need to sell in order to cover their costs. This is normally the bare minimum a business will aim to achieve.

When a business is breaking even, there is no profit and no loss (revenue = total costs).

Question 2

Breakeven formula

Answer 2

Break-even Output = Fixed Costs divided by the Contribution Per Unit.

Question 3

Advantages of breakeven

Answer 3

Break-even provides a simple and easily understood representation of costs, revenue and potential profit.

Break-even is also useful as part of a business plan and can help when seeking a loan.

It also allows the use of ‘what-if’ analysis. Using ‘what-if’ analysis, business owners can judge the impact of a number of costs and revenue variables on profitability.

Question 4

Disadvantages of breakeven

Answer 4

Based on predicted data not actual data
Many unrealistic assumptions such as:
-same price used
-no waste
-all units are sold (no refunds)
-production costs stay the same
-only one product is sold