Unit 5: Business Finance

Question 1

What are the advantages of break-even analysis?

Answer 1

• Charts are relatively easy to construct and interpret
• Analysis provides useful points of consideration - break even points; safety margins; profit/loss
• Comparisons can be made between different options by constructing new charts
• Assists with important decision making e.g. location decisions, buying new equipment etc.

Question 2

What are the limitations of break-even analysis?

Answer 2

• Assumes costs/revenue will be linear but this is not the case e.g. dropping selling price in order to sell all units; paying labour overtime rates in order to produce close to maximum capacity; extra unforeseen maintenance costs due to machine being overworked
• Does not take into account semi-fixed costs
• Assumes fixed costs don’t change. In reality, fixed costs are stepped