Break-Even Analysis

Why is Break-even Analysis a useful tool for Management?

Predicts:

• Break-even output

• Margin of safety

• Estimate profits at different output levels

• Able to tweak details and predict new BEO, MS and profit

How does a Break-Even Analysis highlight the importance of fixed costs?

The lower the Fixed Costs, the lower the Break Even Output which increases Margin of Safety → lower risk

Where could Break-Even Analysis data be used?

Business plan → when looking for sources of finance

How can the Break-Even Analysis be unrealistic?

based on predicted data not actual data

many unrealistic assumptions:

• single same price used

• no waste - no recalls/defects

• all units produced are sold - no refunds

• only one product is sold - no product portfolio

Margin of Safety

actual output - break-even output

level of sales where company would begin to incur a loss

Break-even output

fixed costs / contribution per unit

where total costs and total revenue intersect