Break Even Point

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  • 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.

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