1. Break-Even Analysis Further Uses
Unit 5
Operations Management

2. Learning Objectives
HL – Use these methods to analyse the effects of changes in price or cost on break even , profit and margin of safety
HL - Calculate the required output level for a given target revenue or profit
Analyse the assumptions and limitations of break even analysis

3. HL
Break Even Analysis
Can also be used to assist managers in making key decisions
Charts can be redrawn showing a potential new situation – this can then be compared with the existing position of the business
3 examples of further uses of break even technique

4. HL 1. A marketing decision
Impact of the price increase, this will raise the sales revenue line at each level of quantity sold

5. HL Sales Revenue 2 Costs and sales revenue Sales
Where is the new break even?
Full Capacity
Units of output

6. 2. An operations management decision
Purchase of new equipment with lower variable costs, this will lower the variable cost line at each level of quantity HL

7. Costs and sales revenueHL
Costs and sales revenue
Sales
Total cost 2
Fixed costs 2
Full Capacity
Units of output

8. 3. Choices HL
Choosing between 2 locations for a new factory – with different fixed and variable costs

9. Target Revenue and ProfitHL
Adapted version of the break even formula can be used if the business wants to determine a target profit level and establish the level of output required to achieve it
Formula changes to
Fixed costs + target profit
Target profit level of output =
Contribution per unit
200, ,000 / 50 so 225,000 / 50 = 4500 units
If the target profit is $25,000, fixed costs are $200,000 and contribution per unit $50
Level of output needed to earn the target profit is

10. HL
Break Even Revenue
The amount of revenue needed to cover both fixed and variable so that the business breaks even

11. An evaluation – Usefulness
Charts are relatively easy to construct and interpret
Useful guidelines to management on break even points, safety margins and profit / loss levels at different rates of output
Comparisons can be made between different options by constructing new charts to show changed circumstances
Equation produces a precise break even result
Can be used to assist managers when taking important decisions

12. An evaluation - Limitations
The assumption that costs and revenues are always represented by straight lines is unrealistic TC SR FC
BE1
BE2

13. An evaluation - Limitations
Not all costs can be conveniently classified into fixed and variable costs (semi – variable costs)
No allowance for stock levels, break even chart assumes all units produced are sold

15. (iii) Evaluate the usefulness of using break even charts (8)

16. Answers

17. Answers

18. Answers