# Break Even Analysis

```BREAK EVEN
ANALYSIS
STRENGTHS AND
WEAKNESSES
Aims and Objectives
Aim:
 Understand the strengths and weaknesses of break
even analysis.
Objectives:
 Discuss the strengths and weaknesses of break even
analysis.
 Analyse break even exam questions
Strength or Weakness






Simple concept formula can be understood by most
entrepreneurs.
incorrect break even analysis.
Does not show what will definitely happen, its just a
prediction and a planning aid.
Can be used to support finance applications.
Fixed costs are rarely completely fixed.
Variable costs differ as more large quantities are
Strength or Weakness



Many firms sell more than one product, therefore it
is harder to apply to these businesses.
Can be quickly adapted to suit different potential
Can be used for planning ahead and decision
making.
Exam Style Question
‘Tom forecast that the average customer would
spend &pound;15.60 per visit. He believed that he would have
variable costs per customer visit of
&pound;5.10 in 2011. He was expecting to reduce his variable
costs by 10% in 2012. Based on
information from the franchisor and a survey of a small
random sample of local people, Tom estimated that he
would get 7700 customers in the first year…. high
payments for the rights to be a franchisee meant
that fixed costs would be &pound;63 000 per annum
Exam Style Question
2011 Break Even First
Definition:
Fixed Costs / Contribution Per Unit


We know fixed cost but not CPU.

Contribution per unit = SPpu-Vcpu

&pound;15.60 - &pound;5.10 = &pound;10.50

&pound;63,000 / &pound;10.50 = 6000 customers/units
2012 Break Even Second


Variable costs per customer fallen 10%
Variable cost = &pound;5.10 / 100 = &pound;0.051 x 10 =
&pound;0.51

&pound;5.10 - &pound;0.51 = &pound;4.59

&pound;4.59 new variable cost per customer
2012 Break Even Second

New contribution = Selling Price – New VC figure

&pound;15.60 - &pound;4.59 = &pound;11.01= CPU

Break Even = Fixed Costs / CPU

63,000 / &pound;11.01 = 5722 or 5723 customers to
break even
Calculate Change in Break Even


2011 Break Even – 2012 Break Even
6000 – 5723 = 277 or 278 fewer customers
needed
```