Break-Even Analysis

How a Break-Even Analysis works:

• Identify Fixed Costs: List all fixed costs (e.g., rent, salaries).
• Determine Variable Costs per Unit: Calculate costs that vary with production (e.g., materials, labor) per unit.
• Establish Selling Price per Unit**:** Set the price at which each unit will be sold.
• Calculate the Break-even Point: Use the formulae to determine the break-even point in units and Euro.
• Visualise with a Break-even Chart**:** Plot total costs and total revenue to find the intersection point.
• Interpret Results**:** Use the analysis to make pricing and sales decisions.

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Advantages of a Break-Even Analysis

• Profit Prediction**:** Identifies the point at which profits will occur, aiding in strategic planning.
• Feasibility Analysis**:** Highlights the financial viability of a product or service before launching.
• Margin of Safety**:** Indicates how much sales can drop before the business incurs losses, providing a safety buffer.
• Cost Management**:** Emphasizes the importance of keeping fixed costs low to reach profitability more easily.

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Disadvantages of a Break-Even Analysis

• Price Assumptions**:** Assumes the selling price of the product never changes, which may not be realistic in dynamic markets.
• Single Product Focus**:** Typically analyzes one product at a time, which might not represent the whole business portfolio.
• Output Assumptions**:** Assumes that sales and output are consistent, not accounting for fluctuations in demand.
• Cost Stability**:** Assumes that variable costs remain constant, which may not be true due to economies of scale or market variations.

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Important Formulae

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Have a go at calculating the break-even point!

A business makes and sells phone cases. It sells each case for €20. The variable cost is €8. The fixed cost is €30,000.

The calculation is shown below:

€30,000/€12 = 2,500

So, the business must sell 2,500 phone cases to break-even.