UK0,M<$b@mevgɦmJ8s =-bU#b5')byiDz)%2.&_NKpGtJ|QGdr:>Fj0rA ؞F&!| 4`,mz3[
Study notes

Breakeven Analysis - Strengths and Limitations

  • Levels: AS
  • Exam boards: AQA, Edexcel, OCR, IB

Break-even analysis is a practical and popular tool for many businesses, including start-ups.

However, you also need to know about the limitations of the method.

Here is a summary of the key issues from the perspective of a startup or new business, for whom breakeven analysis is particularly relevant and important.

Strengths of breakeven analysis

Focuses entrepreneur on how long it will take before a start-up reaches profitability – i.e. what output or total sales is required

Helps entrepreneur understand the viability of a business proposition, and also those who will lend money to, or invest in the business

Margin of safety calculation shows how much a sales forecast can prove over-optimistic before losses are incurred

Helps entrepreneur understand the level of risk involved in a start-up

Illustrates the importance of a start-up keeping fixed costs down to a minimum (higher fixed costs = higher break-even output)

Calculations are quick and easy – great for giving quick estimates

Limitations of breakeven analysis

Unrealistic assumptions – products are not sold at the same price at different levels of output; fixed costs do vary when output changes

Sales are unlikely to be the same as output – there may be some build up of stocks or wasted output too

Variable costs do not always stay the same. For example, as output rises, the business may benefit from being able to buy inputs at lower prices (buying power), which would reduce variable cost per unit.

Most businesses sell more than one product, so break-even for the business becomes harder to calculate

Break-even analysis should be seen as a planning aid rather than a decision-making tool

Subscribe to email updates from tutor2u Business

Join 1000s of fellow Business teachers and students all getting the tutor2u Business team's latest resources and support delivered fresh in their inbox every morning.

You can also follow @tutor2uBusiness on Twitter, subscribe to our YouTube channel, or join our popular Facebook Groups.

Teaching Vacancies


Advertise your vacancies with tutor2u

Much cheaper & more effective than TES or the Guardian. Reach the audience you really want to apply for your teaching vacancy by posting directly to our website and related social media audiences.

Find our more ›

Advertise your teaching jobs with tutor2u