课 17, 主题 4

In Progress

← Previous Next→

break-even-analysis as

课 Progress

0% Complete

Exam code:7131

The value of break-even analysis

Break-even analysis is a financial tool used to determine the point at which the business revenue equals its expenses, resulting in neither profit nor loss
It helps businesses understand the minimum level of sales or output they need to achieve to cover all costs
- This helps managers make informed decisions about pricing and production volumes
It is particularly useful for communicating with stakeholders, including investors or lenders
- It demonstrates the financial viability of the business and gives an insight into potential return on investment

Revenue and costs

Break-even analysis takes into account three main components

The components of break-even analysis

Three interlocking hexagons labelled: variable costs (yellow), fixed costs (blue) and revenue (pink), illustrating the components of break-even analysis. — The main components of a break-even analysis

Sales revenue

Sales revenue is the value of the units sold by a business over a period of time
- E.g. the revenue earned by Apple Music from sales of music downloads
- Sales revenue is a key business performance measure and must be calculated to identify profit
- Sales revenue is calculated using the formula
$Sales space revenue space equals space Quantity space sold space straight x space S elling space price$
- Sales revenue increases as the sales volume increases

Costs

In preparing goods and services for sale, businesses incur a range of costs
- Some examples of these costs include purchasing raw materials, paying staff salaries and wages and paying utility bills, such as electricity
These costs can be broken into different categories
- Fixed costs (FC) are costs that do not change as the level of output changes
  - These have to be paid whether the output is zero or 5,000
- Variable costs (VC) are costs that vary directly with the output
  - These increase as output increases and vice versa
- Total costs (TC) are the sum of the fixed and variable costs

Fixed costs

Graph showing fixed costs as a horizontal red line at $4,000, with cost on the Y-axis and output level on the X-axis, indicating no change in cost with output. — Fixed costs remain constant, regardless of the level of output

The firm has to pay its fixed costs, which do not change, irrespective of whether the output is zero or 100,000 units
The fixed costs for this firm are $4,000

Variable costs

Graph showing a straight red line labelled "total variable costs", increasing linearly with "output level" on the X-axis and "cost ($)" on the Y-axis. — Variable costs increase in direct proportion to output

The variable costs initially rise proportionally with output, as shown in the diagram
At some point, the firm will benefit from a purchasing economy of scale, and the rise will no longer be proportional

Total costs

Graph showing costs versus output level: the fixed cost line is horizontal, and the variable cost and total cost lines both increase with output. — Total costs are the sum of fixed costs and variable costs at each level of output

The total costs are the sum of the variable and fixed costs at each level of output
Total costs cannot be zero, as all firms have some level of fixed costs

Constructing and interpreting breakeven charts

A breakeven chart is a visual representation of the breakeven point and is used to identify the following:
- Fixed costs, total costs and revenue over a range of output
- The breakeven point — where total costs are equal to revenue
- Profit or loss made at each level of output
- The margin of safety

Diagram: Breakeven chart

A graph showing monthly revenue and costs for van rentals, with lines for fixed costs, total costs and revenue, highlighting the breakeven point, profit and margin of safety. — The breakeven chart for A2B Lim

Responses