# Break Even Point

• Break Even Point
• Formula
• Fixed costs/ price - variable costs
• Uses of Break Even Analysis
• Shows the minimum sales needed to avoid losses and shows the margin of safety
• Businesses are able to conduct 'what if' analysis - seeing what will happen if prices change, variable costs change or fixed costs change
• Helps businesses make pricing decisions
• The business can predict profit - if the price is fairly fixed, the firm can estimate sales and work out profit
• The business can seek finance by illustrating how profitable the firm will be.
• Break even charts are a useful way for accountants to present financial information to management
• Break even analysis gives the business a starting point to indicate if continuing is worthwhile
• Drawbacks of Break Even Analysis
• Break even analysis and charts are a prediction and so are only as accurate as the data they are based on.
• Break even analysis is difficult in a multi-product business.
• This assumes production and sales are the same and does not account for the surplus of stock a business may have
• Break even calculations assumes that prices are constant
• Variable costs per unit may change as a result of a discount, for example buying materials in bulk
• For a new product businesses may be uncertain about the price they will charge, nor they will know the variable costs or fixed until they begin production.
• Definition
• The point at which total costs = total revenue
• Break Even Point
• Formula
• Fixed costs/ price - variable costs
• Uses of Break Even Analysis
• Shows the minimum sales needed to avoid losses and shows the margin of safety
• Businesses are able to conduct 'what if' analysis - seeing what will happen if prices change, variable costs change or fixed costs change
• Helps businesses make pricing decisions
• The business can predict profit - if the price is fairly fixed, the firm can estimate sales and work out profit
• The business can seek finance by illustrating how profitable the firm will be.
• Break even charts are a useful way for accountants to present financial information to management
• Break even analysis gives the business a starting point to indicate if continuing is worthwhile
• Drawbacks of Break Even Analysis
• Break even analysis and charts are a prediction and so are only as accurate as the data they are based on.
• Break even analysis is difficult in a multi-product business.
• This assumes production and sales are the same and does not account for the surplus of stock a business may have
• Break even calculations assumes that prices are constant
• Variable costs per unit may change as a result of a discount, for example buying materials in bulk
• For a new product businesses may be uncertain about the price they will charge, nor they will know the variable costs or fixed until they begin production.