Break Even Point
- Created by: SiobhanGarnham-Parks
- Created on: 04-01-16 15:10
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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.
- Formula
- 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.
- Formula
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