Break Even Analysis
A break even analysis is a method used widely by businesses to assist them with finance. The break even analysis shows a business when their amount of revenue is equal to their costs. This is known as the break-even point. Although the break even analysis shows many other things, this is the main thing companies look out for when composing a break even graph. The break even analysis is very important to businesses as it a way of measuring their success over a certain period of time. The break even analysis also allows businesses to plan ahead by looking at their present financial status. Although break even charts are beneficial there are some limitations:
▪ Break even analysis doesn’t tell a business about what sales are actually likely to be for the product at these various prices. ▪ It assumes that fixed costs are always constant which sometimes may not be the case. ▪ It assumes that quantity of goods produced are the same as the quantity of the goods sold, which is certainly not the case in most businesses.
To show the break even analysis, a graph is devised. The point where the total revenue and the costs meet is the amount of sales needed to break even. Seeing as some people do not have enough time to devise this graph they use another method to find out exactly the same thing. This method is called the contribution method and it is also more accurate then the graph.
To calculate the contribution method you:
Fixed Costs / Selling Price – Variable Cost = Contribution Method
We did both methods, as we had some time and at the end checked that they matched each other. To devise the graph we used the table below. When working out the revenue we realised that we didn’t have one set price for the hot chocolate so we decided to work out an estimated average price which was 85p and use that.
|Hot chocolate sold |Fixed costs |Variable costs |Total costs |Revenue...