analysis allows firms to identify the minimum level of sales needed to make a
profit. It is possible to identify the break-even point on a
to the break-even output the firm will operate at a loss and at higher levels
the firm will receive a profit. The
difference between the break-even and present outputs is known as the margin
of safety, in other words the quantity sold can fall by that amount before
the firm will start to lose money.
break-even output is a relatively simple task:
= fixed costs ¸
contribution per unit
analysis is an excellent tool to analyse a business.
It is cheap to carry out and it can show the profits/losses at varying
levels of output. Often a new
firm will have to present a break-even analysis in order to secure finance. It does have some limitations:
- It assumes that all
of the output is sold; often not all output will be sold.
- It assumes that all
of the output is old at the same price; often a firm will have to lower
its price in order to increase its sales.
- It assumes that
variable costs are constant, economies of scale may in fact reduce them as
- It is only as useful
as the underlying data, if information is out of date then the analysis
will be flawed.
Shifts in the Break-Even Point
are a number of factors, both internal and external that will lead to a
change in the break-even point.
extra sales staff will increase the fixed costs and therefore the totals
costs, thereby raising the break-even point.
price increase will cause the total revenue to rise at each level of output,
lowering the break-even point.
a greater degree of automisation would increase fixed costs, whilst variable
costs would fall; therefore the effect on the break-even point would be
can vary different factors in a break even simulation by Biz/ed.
a recession occurred the break-even point would be unaffected, however demand
for the product would fall, thereby reducing the margin of safety.
a price war broke out, the revenue would be reduced at each level of output,
causing the break-even point to rise.
would push up variable cost, causing the break-even point to rise.
may miss break-even point
even simulation by Biz/ed
even analysis by Business Town