break even analysis

• What can you learn from a break even chart?

  How to construct and interpret it
• How do you calculate the break even point of a business?

  By creating a graph of costs vs. output
• What are the steps to create a break even chart?

  1. Draw a chart with output on the horizontal axis.
  2. Draw fixed costs as a horizontal line.
  3. Draw variable costs starting at fixed costs height.
  4. Draw the total costs line.
  5. Draw the revenue line starting at zero.
• What does the break even point represent on the chart?

  Where total costs and revenue lines cross
• What happens above the break even point?

  It indicates profit
• What is the break even point in units sold?

  2,858 units
• What is the break even point in money earned?

  £440,000
• What do the shaded areas on the break even chart represent?

  Areas of loss and profit
• What is the margin of safety on the chart?

  Distance between break even and actual sales
• What are the benefits of break even analysis?

  • Identifies overlooked expenses
  • Projects revenue in terms of profit margin
  • Aids in setting clear goals
  • Supports better decision-making for expansion and pricing
• What are the limitations of break even analysis?

  • Assumes constant selling prices
  • Assumes static costs
  • Does not factor in unsold products
  • Complex for multiple product types
• What does break even analysis assume about product selling prices?

  They remain constant
• What does break even analysis assume about costs?

  They remain static
• What does break even analysis not consider regarding products?

  Unsold products or wastage
• Why does determining the break even point become complex?

  When a business offers multiple product types
• What is the process to create a break even chart?

  1. Draw fixed costs as a horizontal line.
  2. Draw variable costs starting from fixed costs height.
  3. Draw total costs line rising diagonally.
  4. Draw revenue line starting at origin.
  5. Identify break even point where lines cross.
• What does anything below the break even point indicate?

  It indicates a loss
• What is the relationship between total costs and revenue at the break even point?

  They are equal