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Give an explanation of break-even analysis and explain how it supports the achievement of strategic aims and objectives.

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Introduction

Section 2 1. Give an explanation of break-even analysis and explain how it supports the achievement of strategic aims and objectives. Break-even analysis compares a firm's revenue with its fixed and variable costs to identify the minimum sales level needed to make a profit. The starting point for all financial management is to know how much goods or services cost to produce. If a business knows how many products they have to sell, they can benefit from it because this can cover their costs. This is particularly important for new businesses with limited experience of their products or their markets. It is also of value for established businesses which are planning to produce a new product. A company whose aims and objectives are growth, continuity, investment, innovation etc can use break-even analysis as a cheap, quick and simple tool to analyse and estimate the future level of output they will need to produce and sell in order to meet given objectives in terms of profits. It can also help to assess the impact of planned price, changes upon profit and the level of output needed to break-even. ...read more.

Middle

The vertical axis records values of costs & revenues. It goes from �0 to maximum output multiplied by the selling price. In this case it will have a maximum value on the axis of �250,000(�1x250, 000) Having drawn the axis and placed sales upon them, the first line to draw is fixed costs. Since this value does not change with output, it is a horizontal line placed at �50, 000 250 200 Costs and 150 revenues in 100 pounds(�000s) 50 Fixed costs 0 50 100 150 200 250 Output of goods (000kg) FIGURE 1:is showing the fixed costs The costs in figure 1 cover rent and rates. Next, add on variable costs to arrive at total costs. The difference between total costs and fixed costs is variable costs. Total costs start at the fixed costs line and then rises diagonally. To see where they rise to, calculate total costs at the maximum output level. In this case, this is 250, 000kg per year. The total cost is fixed costs (�50 000) plus variable costs producing 250kg (�0.60x250, 000=�150 000). So total cost at this level of output �50 000 + �150 000=�200 000. ...read more.

Conclusion

2. Analyse the importance of break-even analysis in one of your selected businesses and indicate how these techniques may have been taken into account in management decisions to supply goods or services. As with most techniques of financial control, break-even analysis has advantages and disadvantages. Break-even analysis is simple to conduct and understand. It is cheap and can also be carried out quickly. If presented in the form of a chart, it shows profit and loss at various levels of output. This relates to a business when it's first established. Break-even analysis can cope with changing circumstances. It can also allow for changing revenues and costs, and gives a valuable guide to potential profitability. Nevertheless, as many things: break-even has its share of drawbacks, it pays little attention to the realities of the market place. Therefore, any businesses including 'Nike,' should take into account external influence before making any important decisions. A major flow is its assumption that all output is sold, which would result in an inaccurate break-even estimate. Although break-even can cope with changes in prices and costs, it would be difficult to use it as a forecasting technique because such factors change regularly. Break-even forecasts can also invalidate due to changes in tastes, fashion, exchange rates and technology. ...read more.

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