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

Changes to break-even

• 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

Changes in variables and the break-even point

Increased 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

Decreased selling price

• 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

• 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

Decreased variable costs

• 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

• 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

Decreased fixed costs

• 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

Benefits and limitations of break-even analysis

• 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

Benefits of break-even analysis

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

Limitations of break-even analysis