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3.2 Break-Even AnalysisUnit 3: Investigating Financial Control

Unit 3: Investigating Financial Control

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3.2 Break-Even Analysis

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Contents

Teacher’s notes included in the Notes Page

Flash activity (these activities are not editable) Printable activity

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For more detailed instructions, see the Getting Started presentation

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Understanding the break-even point

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In this section, you will consider what the break-even point is.

Defining the break-even point

Why the break-even point is useful

Balancing costs and revenue

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Imagine that the local council has given you permission to run an ice cream van on the beach. How many ice creams will you need to sell per week in order to make a profit?

One?

Case study: ice cream van business

The answer to this question – identifying the point at which the number of ice creams

sold becomes profitable – is the

break-even point.Twenty?

Five hundred?

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The break-even point is the level of output where an organization will just cover its costs.

What is the break-even point?

When a business first starts up, its first financial objective is likely to be to break even, particularly if it is a small business.

It is the point when a business is making neither a profit nor a loss because its overall income is equal to its expenditure.

If the business sells more than this, it will make a profit.

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Break-even analysis

Break-even analysis is very important for businesses because it can help them to make important decisions about future investments.

It is also a good way for businesses to assess the level of risk involved in a new venture if costs and revenue do not turn out as originally predicted.

For example, if a business is launching a new product or service, it can use break-even analysis to forecast whether this venture is likely to make a profit.

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Figures needed for break-even analysis

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Costs: fixed costs

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Costs: variable costs

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Balancing costs and revenue