- Level of demand may change.
- Reducing prices to increase demand may at fist be effective, but it is unsustainable.
- Profit depends on the level of risk involved.
- Innovation and the introduction of new technologies can easily affect break-even.
- Luck.
Frequently Asked Questions: How Changes Impact Break-Even Analysis
How does break-even analysis help evaluate the impact of changes?
Break-even analysis is a powerful tool for evaluating the impact of changes in a business's key variables: fixed costs, variable costs per unit, and selling price per unit. By recalculating the break-even point with new values, a business can see how these changes affect the sales volume needed to become profitable.
How do changes in costs impact the break-even point?
- Changes in Fixed Costs: An increase in total fixed costs will increase the break-even point (requiring more units or revenue to cover higher fixed expenses). A decrease in fixed costs will decrease the break-even point.
- Changes in Variable Costs Per Unit: An increase in the variable cost per unit will increase the break-even point (reducing the contribution margin per unit). A decrease in variable cost per unit will decrease the break-even point.
How do changes in sales prices impact the break-even point?
Assuming costs remain constant, changes in the selling price directly affect the contribution margin per unit:
- An increase in the selling price per unit will decrease the break-even point (increasing the contribution margin per unit, so fewer units are needed to cover fixed costs).
- A decrease in the selling price per unit will increase the break-even point (decreasing the contribution margin per unit).
Does the break-even point change whenever there is a change in fixed costs, variable costs, or selling price?
Yes. The break-even point is directly calculated using these three variables: Total Fixed Costs, Variable Cost Per Unit, and Selling Price Per Unit. Any change in one or more of these components will result in a change to the calculated break-even point.
Does the break-even point in unit sales change with traceable costs?
Yes, if those traceable costs are part of either the total fixed costs or the variable costs per unit. Traceable costs are simply costs that can be directly attributed to a specific product, department, or activity. If a traceable cost is fixed (like the lease on equipment used for a specific product line), a change in that cost will change the total fixed costs and thus the break-even point. If a traceable cost is variable (like materials used in a product), a change will alter the variable cost per unit and also change the break-even point.
How does a change in volume affect break-even?
The break-even point is a *target volume* or *target revenue*. It's not affected *by* changes in volume in the sense that reaching a certain sales volume doesn't change the point itself (unless reaching that volume triggers cost changes like bulk discounts). Instead, changes in costs or price *affect* the volume needed to reach the break-even point.
