Using Break-Even (OCR GCSE Business)

Using Break-Even in Decision Making

• Break-even analysis can support decision making

  • It provides valuable insights into the financial viability and performance of a business

  • It helps in weighing up the potential risks and rewards associated with different decisions

The Benefits of Break-Even Analysis

Limitations of Break-Even Analysis

• In common with other quantitative analysis tools, break-even analysis has some limitations

Costs and revenues do not always increase in direct proportion to units sold

• Businesses may be able to negotiate bulk-buying discounts that reduce variable costs per unit at high levels of output

• Fixed costs could increase significantly at higher levels of output as more staff or equipment may be required

• Buyers may demand discounts for placing large orders, which will reduce the selling price per unit

Cost data is often an estimate 

• If break-even is used for forecasting, future cost estimates are used

• The reliability of these estimates depends on the skills and experience of buyers and financial planners

It is less useful when a business sells more than one product

• Break-even calculations are more complex and less reliable when products with different selling prices and variable costs need to be considered

Some output may remain unsold

• Break-even calculations assume that all output is sold

• In reality, businesses keep some stock as a buffer to meet demand at a later date

• Unsold stock may be sold at a lower price to reduce storage costs or raise cash

Break-even charts can be difficult to amend

• Changes to costs and and selling prices may require new models to be drawn up, which requires expertise and may take some time