Break even point

Break-even point is when the total costs equal total revenue

The break-even point is the minimum point at which the business can survive – it is neither making a profit nor a loss, it is simply covering its costs.

If it can sell more goods than its break-even level then the business will be making a profit. If sales are below the break-even level, then the business will be making a loss.

Importance:

• Shows the amount of goods which need to be sold in order to make a profit.
• Level of costs which can be survived.
• Price which needs to be charged for goods.
• How price change would affect profits (‘WHAT IF’ ANALYSIS).

Advantages: 

Shows how many products they need to sell to ensure a profit. 

Shows the amount of revenue the business will make at each level of output

Shows whether a product is worth selling or if its too risky

Disadvantages: 

Unrealistic assumptions – products are not sold at the same price at different levels of output; fixed costs do vary when output changes

Sales are unlikely to be the same as output – there may be some build up of stocks or wasted output too

It can only be applied to a single product or a mix of products - limiting to a business that sells multiple products