The Importance of Break-Even Flashcards

All 7 cards in this deck

Give one benefit to a business of using break-even analysis.

Any one of: it shows the level of output needed to cover costs; it shows the sales needed, so sales targets can be set for employees.

What is the break-even point?

The number of products a business must sell so that revenue and total costs are equal — neither profit nor loss is made.

Give one limitation of break-even analysis.

Any one of: it assumes every unit produced is sold; it assumes price and costs stay the same; it is only as accurate as the forecast figures used.

What happens to the break-even level of output if costs increase?

It rises — the business must sell more units to cover its costs, and profit falls.

What happens to the break-even level of output if the selling price is increased?

It falls, because each unit sold covers more of the fixed costs. However, a higher price may put customers off, so sales could fall.

How can break-even analysis help a business with pricing decisions?

It shows whether a change in price will affect its ability to break even, so prices can be set to cover costs.

How can a break-even forecast help a business get a bank loan?

It shows the bank that the owner knows how many products must be sold to cover costs, making the business plan more convincing.