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