Rana Habib Rahman
Alex Kamatho
Unit 7 D1
In this assignment I will evaluate the reliability of breakeven analysis in estimating budgeted activity
levels for European Delights.
A break-even analysis is an analysis to determine the point at which revenue received equals the costs
associated with receiving the revenue. Break-even analysis helps to calculate margin of safety, which
is the amount of quantity a business must sell in order to meet its expenses and anything above then
would be beneficial for them in the form of profits. The data is developed by using previous years
financial report, hence breakeven is reliable to estimate current year’s results for a short period.
Break even analysis is based on certain assumptions that might not happen. Break even can only be
applied for one product or service and it assumes that all goods would be sold. It also assumes that
price will remain unchanged and fixed costs would remain fixed which is clearly not true as some
prices can exceed with the amount of time that is used. Semi Variable costs are not taken in
consideration as they are often divided into fixed costs and break even analysis ignores external
factors such as inflation.
There are certain benefits of break-even analysis; it can help to identify the number of units/services
needed to be sold to break even and anything above that would be profit for the organization. It’s less
time consuming and helps to set goals and objectives for an organization. There’s also a visual
representation of the break even graph that can help steer the business accordingly and also track
progress in terms of its achievements towards the goals. This can also give businesses competitive
edge as it helps to create strategic decisions which can yield great benefits if done and met correctly.
However everything has its own drawbacks and using break-even analysis it can fail to give accurate
results as it does not consider external factors, which means the actual results can differ a great deal to
what an organization expected. Another very crucial point for an organization is that break even only
considers one product at a time and if a company is selling more than one product then break even
analysis would have to be done on each product which can prove to be very time consuming and
costly as experts need to be hired. Also during the financial year if the prices go up temporarily then
break even won’t consider the changes and as a result it can prove to be more of a disadvantage for
the business. Also if the cost of the business increases then the breakeven would have to be changed
for all of the products which can be time consuming again and if the company decides not to change
the break even analysis then all the figures including profits and breakeven point would be wrong.
Also if they change the data then all other information would have to be changed and then business
would have to allocate their goals and objectives accordingly.
European Delights can have difficulties for using break even analysis as break even considers that all
products produced would be sold, which means European delights needs to sell 1,625 dishes every
month in order to break even and then they can earn profits. However this is also not true as it does
not consider the external factors such as quite months where the business would be less as well as the
economic situation the country would be surrounded in.
Another issue with Break Even analysis that it assumes that the variable cost would remain constant
per unit sold. But however some businesses like European delights don’t know the exact cost that
goes into a product and hence it can vary from one product to another. For instance sugar might be
added more to a pastry then to coffee, but breakeven would consider this cost to be the same for both,
which is clearly not the case. There also external factors for example the labour that helped to get the
product to a saleable condition or the waste such as food waste in creation of a product.
1
Alex Kamatho
Unit 7 D1
In this assignment I will evaluate the reliability of breakeven analysis in estimating budgeted activity
levels for European Delights.
A break-even analysis is an analysis to determine the point at which revenue received equals the costs
associated with receiving the revenue. Break-even analysis helps to calculate margin of safety, which
is the amount of quantity a business must sell in order to meet its expenses and anything above then
would be beneficial for them in the form of profits. The data is developed by using previous years
financial report, hence breakeven is reliable to estimate current year’s results for a short period.
Break even analysis is based on certain assumptions that might not happen. Break even can only be
applied for one product or service and it assumes that all goods would be sold. It also assumes that
price will remain unchanged and fixed costs would remain fixed which is clearly not true as some
prices can exceed with the amount of time that is used. Semi Variable costs are not taken in
consideration as they are often divided into fixed costs and break even analysis ignores external
factors such as inflation.
There are certain benefits of break-even analysis; it can help to identify the number of units/services
needed to be sold to break even and anything above that would be profit for the organization. It’s less
time consuming and helps to set goals and objectives for an organization. There’s also a visual
representation of the break even graph that can help steer the business accordingly and also track
progress in terms of its achievements towards the goals. This can also give businesses competitive
edge as it helps to create strategic decisions which can yield great benefits if done and met correctly.
However everything has its own drawbacks and using break-even analysis it can fail to give accurate
results as it does not consider external factors, which means the actual results can differ a great deal to
what an organization expected. Another very crucial point for an organization is that break even only
considers one product at a time and if a company is selling more than one product then break even
analysis would have to be done on each product which can prove to be very time consuming and
costly as experts need to be hired. Also during the financial year if the prices go up temporarily then
break even won’t consider the changes and as a result it can prove to be more of a disadvantage for
the business. Also if the cost of the business increases then the breakeven would have to be changed
for all of the products which can be time consuming again and if the company decides not to change
the break even analysis then all the figures including profits and breakeven point would be wrong.
Also if they change the data then all other information would have to be changed and then business
would have to allocate their goals and objectives accordingly.
European Delights can have difficulties for using break even analysis as break even considers that all
products produced would be sold, which means European delights needs to sell 1,625 dishes every
month in order to break even and then they can earn profits. However this is also not true as it does
not consider the external factors such as quite months where the business would be less as well as the
economic situation the country would be surrounded in.
Another issue with Break Even analysis that it assumes that the variable cost would remain constant
per unit sold. But however some businesses like European delights don’t know the exact cost that
goes into a product and hence it can vary from one product to another. For instance sugar might be
added more to a pastry then to coffee, but breakeven would consider this cost to be the same for both,
which is clearly not the case. There also external factors for example the labour that helped to get the
product to a saleable condition or the waste such as food waste in creation of a product.
1
