1 / 12

BREAK EVEN ANALYSIS

BREAK EVEN ANALYSIS. BREAK EVEN ANALYSIS – USES. To analyse level of output/sales needed to make a profit. To measure profit/loss at different levels of output. To analyse sales revenue/total costs at different levels of output. USES - continued.

marty
Télécharger la présentation

BREAK EVEN ANALYSIS

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. BREAK EVEN ANALYSIS

  2. BREAK EVEN ANALYSIS – USES • To analyse level of output/sales needed to make a profit. • To measure profit/loss at different levels of output. • To analyse sales revenue/total costs at different levels of output.

  3. USES - continued • To assess changes in production on profitability. • To assess changes of price/costs on profitability. • To aid forecasting and planning. Analysis may be done • graphically in a break even chart • using formulae • in a table

  4. How to draw a break even chart Let’s look at a clip to show how to draw a break even chart.

  5. The margin of safety The difference between actual output and the break even output.

  6. Break Even Point • The point at which total costs are covered and no profit or loss is made. • The point at which the total revenue and total costs lines interest on the chart.

  7. Break Even Formula = fixed costs selling price per unit – variable costs per unit or to put it another way ………… = fixed costs contribution per unit

  8. Break Even Calculation Assuming that a product has a selling price of £6. Variable costs are £1 per unit and fixed costs are £50,000 per year. Calculate the number of units that must be sold for the firm to break even.

  9. Break Even Calculation Assuming that a product has a selling price of £6. Variable costs are £1 per unit and fixed costs are £50,000 per year. Calculate the number of units that must be sold for the firm to break even. Answer £50,000 = 1,000 UNITS £6-£1

  10. STRENGTHS OF BREAK EVEN • Shows different levels of profit coming from various levels of output/sales and so help to predict profit levels. • A quick estimate. • “What if” scenarios. • Calculates level of output required to reach profit (very useful to new businesses, which often have cash flow problems).

  11. LIMITATIONS OF BREAK EVEN • Depends on accuracy of data used. • Based on forecasts. Difficult as actual production costs can change. Why? • Assumes a simple relationship between variable costs and sales (everything stays the same) but in real life: • VC’s do not stay the same. Does not allow for bulk buying discounts. Firms try to reduce VC’s per unit. • SP may change (supply and demand) • FC may not stay the same (new buildings/machinery) • Sales income does not necessarily rise in constant relationship to sales volume (some product may remain unsold)

  12. KEY CONCEPTS • Break even output • Margin of safety • Contribution per unit • Fixed costs • Variable costs • Break even calculation BEP = FC SP-VC

More Related