Break even analysis

• Break even is the amount of products/services a business has to sell in order for the total revenue to equal total costs; at this point, profit = £0
• Break even = fixed costs / contribution per unit (Sales price per unit - Variable costs per unit)
• A break even analysis allows businesses to correctly price their products and allows them to work out how patient they want to be in regards to making a profit e.g. a business may need 500 sales of a product to get to their break even at £5 per product, however a business may increase/ decrease the price dependant on how quickly they want to reach their break-even point
• Break even analysis also allows for a business to set revenue targets, gain external funding, see the outcome of 'what if' questions, and to mitigate risks
• Break even is useful as it can be adapted to changing circumstances for example an increase in raw materials, increase in price etc etc. A break even analysis is also cheap to construct
• Break even data can have its limitations as it ignores the economies of scale of products, assumes that all output is sold when in a realistic world a business may have excess stock and may charge a cheaper price to get rid of it, each break even chart is for 1 product only so a business that offers a wide variation in products may have to construct lots of these = time consuming