Break Even aqa

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Exam code:8132

The concept of break-even

Break-even analysis is a financial tool used to determine the number of units a business must sell to reach a point where its revenue equals its expenses (no profit nor loss)
- It helps businesses understand the minimum level of sales or output they need to achieve in order to cover all costs
- This helps business managers make informed decisions about pricing and production volumes

Fixed costs are costs that do not change regardless of the level of production or sales
- They remain the same at every level of output
  - E.g. rent, salaries and insurance
Variable costs are costs that vary with the level of production or sales
- They increase in direct proportion with the level of output
- E.g. raw materials, direct labour costs, packaging and shipping costs
Total costs are the sum of fixed costs and total variable costs at a particular level of output, calculated using the formula

$Total space costs space equals space Fixed space costs space plus space Total space variable space costs$

Revenue is the money gained from selling products, calculated using the formula

$Sales space revenue space equals space Selling space price space cross times space Number space of space items space sold$

You will not be expected to use the break even formula in your exam, but you may be asked to calculate revenue, costs or profit using given figures.

Break-even analysis provides valuable insights into the financial viability and performance of a business
It is particularly useful for communicating with stakeholders, including investors or lenders
- It demonstrates the financial viability of the business and gives them an insight into the potential returns they can expect on investment

Benefit	Explanation
Profitability assessment	It helps identify the level of sales required to avoid losses and provides a target for achieving profits
Cost control	Break-even analysis helps in identifying fixed and variable costs and their impact on the business
Pricing decisions	Break-even analysis helps managers set prices at a level that generates sufficient revenue to cover costs and generate a profit
Financial planning	Break-even analysis can help with target setting such as realistic sales targets and plans for necessary expenses
Performance monitoring	By comparing actual sales and costs against the break-even point, businesses can assess their financial health and track progress
Decision making	It helps in weighing up the potential risks and rewards associated with different decisions

However, in common with other quantitative analysis tools, break-even analysis has some limitations