Changes to & Limitations of Break-even (HL IB Business Management)

• Changing any of the variables of break-even (selling price, variable cost per unit or total fixed costs) changes the break-even point and level of profit it can expect to achieve
   

How the Break-even Point & Level of Profit is Affected by Changes in Variables

Increased Selling Price	Decreased Selling Price
An increase in the selling price reduces the break-even point   An increase in the selling price increases revenue at each level of output from R1 to R2 The Break-even Point falls from BEP1 to BEP2 Profit on each unit of output greater than the break-even point is increased	A decrease in the selling price increases the break-even point   A decrease in the selling price reduces revenue at each level of output from R1 to R2 The Break-even Point rises from BEP1 to BEP2 Profit on each unit of output greater than the break-even point is decreased
Increased Variable Costs	Decreased Variable Costs
An increase in variable costs increases the break-even point   An increase in variable costs increases total costs at each level of output from TC1 to TC2 The Break-even Point increases from BEP1 to BEP2 Profit on each unit of output greater than the break-even point is decreased	A decrease in variable costs decreases the break-even point   A decrease in variable costs decreases total costs at each level of output from TC1 to TC2 The Break-even Point falls from BEP1 to BEP2 Profit on each unit of output greater than the break-even point is increased
Increased Fixed Costs	Decreased Fixed Costs
An increase in fixed costs increases the break-even point An increase in fixed costs increases total costs at each level of output from TC1 to TC2 The Break-even Point increases from BEP1 to BEP2 Profit on each unit of output greater than the break-even point is decreased	A decrease in fixed costs decreases the break-even point A decrease in fixed costs reduces total costs at each level of output from TC1 to TC2 The Break-even Point falls from BEP1 to BEP2 Profit on each unit of output greater than the break-even point is increased

• Break-even analysis provides valuable insights into the financial viability and performance of a business
   
• It is particularly useful for communicating with stakeholders including investors or lenders
  • It demonstrates the financial viability of the business and gives an insight into potential returns on investment
      

The Benefits of Break-even Analysis

Use of Break-even	Explanation
Profitability assessment	It allows businesses to assess their profitability by determining the minimum level of sales needed to cover all costs It helps identify the level of sales required to avoid losses and provides a target for achieving profits
Cost control	Break-even analysis helps in identifying fixed and variable costs and their impact on the business By understanding the cost structure businesses can evaluate their spending patterns and reduce unnecessary expenses
Pricing decisions	Break-even analysis provides insights into pricing decisions by helping businesses determine the minimum price required to cover costs and achieve the desired level of profit It ensures that prices are set at a level that generates sufficient revenue to meet expenses and generate profits
Financial planning	Break-even analysis assists in financial planning by providing a reference point for target setting such as realistic sales targets and plans for necessary expenses
Sensitivity analysis	Break-even analysis allows businesses to conduct sensitivity analysis by evaluating the impact of changes in variables such as costs, prices, and sales volumes on the break-even point This helps in understanding the potential risks and uncertainties such as a new competitor entering the market or suppliers increasing prices
Performance monitoring	Break-even analysis serves as a benchmark for monitoring business performance over time By comparing actual sales and costs against the break-even point businesses can assess their financial health and track progress
Decision making	Break-even analysis provides a basis for informed decision making  It helps in evaluating the feasibility of new projects and expansion plans - by considering the break-even point, businesses can assess the potential risks and rewards associated with different decisions

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

Diagram Explaining the Limitations of Break-even Analysis

The limitations of break-even analysis