Breakeven - Advantages

1. It is a quick way of calculating the output level needed to breakeven and the result is easy to understand even for non-finance specialists. 2. It can also show the profit made at various levels of output. 2. Changes in fixed costs, variable costs or selling price can be easily plotted to show revised Break-even points and the overall effect on profit. 3. It can be used to support an application for finance by showing if and when a loan or overdraft can be repaid. 4. Can be used to calculate how many units need to be produced/sold in order to attain a target rate of profit. 6. Shows margin of safety clearly. Breakeven - Disadvantages 1. TC and TR functions assumed to be linear. Changes may occur in either or both in reality. It does not take into account purchasing economies of scale for example. 2. Effectiveness depends on accuracy of information used to construct TR and TC functions, if not accurate, then neither will conclusions be. 3 Breakeven analysis is based on a static model. In reality, business conditions change. It can not cope with sudden changes in any of the variables. 4. BE model assumes all output is sold and none is held, in reality stocks held to cope with sudden increase in demand, or indeed, firm may not be able to sell all output. 5. The further away Be point is from current levels of output, the less accurate are the profit or loss figures. 6. It is less useful for a large multi product company (company selling many products).

Knowledge& content (3 marks) Good knowledge of BE shown (3 marks)

Application & analysis (4 marks) Good analysis of +s and s of BE to a small company making fashion items (3-4 marks) Some analysis but not related to case study (1-2 marks)

Evaluation (3 marks) Good judgement shown in concluding on value of the technique (3 marks) Some judgement shown (1-2 marks)

Some knowledge of breakeven (1-2 marks)

Ske/Aslevel/Fin/BreakevenAds&Disads&sample answer 30/11/2011

Possible answers: Advantages: 1. Easy technique useful for managers with little experience working in a small firm. 2. Gives indication of sales level needed to make a profit. 3. Can be used to shown effect of reducing prices in a competitive market. Disadvantages: 1. May be difficult to cope with markets in which tastes and fashions change regularly. 2. May be time-consuming to do BE charts for more than one product line (different T shirts, and convert these into e.g. Euros). 3. Does not take account of e.g. possible purchasing economies of scale. Use a 3 paragraph approach: Paragraph 1: Advantage

Breakeven analysis is useful for this company because it gives managers a quick indication of how much profit or loss they are likely to make at various levels of output. It is useful to managers in this company who may have little prior experience of working with breakeven. The chart allows them to easily calculate if they are likely to make a profit on particular product lines; thereby reducing the risk of making a loss. The company must however be aware that the accuracy of the information depends to a great extent on the quality of the information used to construct the chart.
Paragraph 2: Disadvantage (As above, move up the levels of response) Paragraph 3 Evaluation: Give your opinion, is it useful or not? Why in this situation? On balance, which argument is stronger? Do the strengths outweigh the weaknesses? Distinguish between the short term and long term usefulness of it. What does its usefulness depend on? E.g. other factors such as how volatile (changeable) the market is, what it is to be used for? e.g. in this case not only would breakeven be a useful technique for the company; it may be essential in order to gain the finance available to support its expansion plans.

Ske/Aslevel/Fin/BreakevenAds&Disads&sample answer 30/11/2011