Break Even Analysis Strengths and weaknesses

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Presentation transcript:

Break Even Analysis Strengths and weaknesses AS Business Studies

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. Misleading data or inaccurate information leads to 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 produced, not steady.

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 things happening to the business Can be used for planning ahead and decision making.

Exam Style Question ‘Tom forecast that the average customer would spend £15.60 per visit. He believed that he would have variable costs per customer visit of £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 £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 £15.60 - £5.10 = £10.50 £63,000 / £10.50 = 6000 customers/units

2012 Break Even Second Variable costs per customer fallen 10% Variable cost = £5.10 / 100 = £0.051 x 10 = £0.51 £5.10 - £0.51 = £4.59 £4.59 new variable cost per customer

2012 Break Even Second New contribution = Selling Price – New VC figure £15.60 - £4.59 = £11.01= CPU Break Even = Fixed Costs / CPU 63,000 / £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