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

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

• 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

• 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

• 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

• 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

• 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

• 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

• 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