Break Even

• Break even - When the business' total sales equals the total costs. There is neither profit nor loss
• Break even = Fixed Costs ÷ (Selling Price - Variable cost per unit)
• Advantages of Break-Even Analysis:

  • It shows how many products they need to sell to ensure a profit
  • It shows whether a product is worth selling or is too risky
  • It shows the amount of revenue the business will make at each level of output
  • It shows whether costs need to be reduced to lower the break even point (BEP)
  • It can be used to persuade investors or banks to finance a business
  • It is quick and easy to analyse
• Disadvantages of Break-Even Analysis

  • Break even assumes a business will sell all the stock (of a particular product) at the same price
  • Businesses can be unrealistic in their calculations
  • Variable costs could change regularly, meaning the analysis could be inaccurate
  • They can be time consuming to create
• Margin of Safety - the amount sales can fall before the break even point is reached and the business makes no profit. This calculation also tells a business how many sales they have made over their break even point (BEP). The larger the margin of safety, the lower the risk for a business