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Break Even Analysis Learning Outcomes By the end of the lesson the students will; • Understand the concept of break even analysis • Identify the assumptions underlying simple break even • Calculate the break even level of output and sales arithmetically • Recognise the uses of simple break even WHAT IS THIS? Airbus A380 The Airbus ‘A380’ is the largest civil aircraft ever built. Designed to carry 555 passengers in a three class arrangement. It has one third more seating capacity than a Boeing 747 and is produced by a company called EADS. Inside the Airbus 1. Model of a possible first class area. 2. A model of a bar area on the new airbus. 3. A model of an onboard duty free. 4. Other features will include; gymnasium, sleeper cabin, crèche, business centre and a casino. Orders to Date Airline No of Aircrafts Emirates 43 Lufthansa 15 Quantas 12 Air France, Singapore Airlines, FedEx, International Lease Finance, UPS 10 Thai Airways, Virgin Atlantic, Malaysia Airlines 6 China Southern Airlines, Korean Air Lines, Kingfisher Airlines 5 Etihad Airways 4 Qatar Airways 2 Total Ordered 159 Aircrafts Timeline of A380 • November 2000 – First A380 order received. Airbus says that it needs to sell 250 of them to break even. • March 2005 – Airbus admits that 270 aircraft needed to break even. • June 2006 – Deliveries delayed by 6 months. • 3 October 2006 – Another 18 month delay (airbus will lose £3.36 billion). • 19 October 2006 – Airbus need £40 billion worth of orders to break even. Break even point now at 420 aircraft only 159 on the books. What is Break Even? • Break even analysis investigates the minimum output and sales that a company requires in order for its revenue to cover its costs. • At a zero level of output, the company will incur fixed costs (e.g. buildings and machinery) without any revenue from sales and so will make a loss. As the company begins to produce, it will incur variable costs (e.g. raw materials and wages), but it will also begin to receive revenue from sales. • Assumptions of break even analysis; – The selling price will remain the same regardless of the number of units sold. – Fixed costs remain the same regardless of the number of units of output. – Variable costs will vary in direct proportion to output. Calculating Break Even To calculate break even the following formula is used; Break Even Output = Fixed Cost (£) Contribution Per Unit (£) Thus a product with a price of £12 and variable costs of £6 will contribute £6 for every unit sold. If fixed costs are £2,500, how many units will need to be sold to break even? Break Even Output = = = = Fixed Cost Contribution Per Unit 2,500 12-6 2,500 6 416.666 or 417 1.d.p