Break-even Analysis - Unit 3

Question 1

What is break even analysis?

Answer 1

A useful tool to help a business make decisions and set targets, and plan for the future. They use ‘what if?’ questions such as: what would be the impact of an increase in variable costs on profit?

Question 2

Break-even analysis can identify strategies for…

Answer 2

Lowering the break-even point and increasing profit

Question 3

When might a business use break-even? Name 2. (5)

Answer 3

• Understanding the past (were past decisions on price correct?)
• Setting and achieving production targets
• Launching a new product
• Starting a new business
• Developing a business plan

Question 4

What’s a disadvantage to break-even analysis?

Answer 4

The concept of break-even assumes that a business will sell all the products it makes. In reality, if a business increases price it will lower the break-even point, but this might deter customers from buying the more expensive product.