### Break Even Analysis

```Break Even Analysis
Learning Outcomes
By the end of the lesson the students will;
• Understand the concept of break even
analysis
• Identify the assumptions underlying simple
break even
• Calculate the break even level of output
and sales arithmetically
• Recognise the uses of simple break even
WHAT IS THIS?
Airbus A380
The Airbus ‘A380’ is the
largest civil aircraft ever
built. Designed to carry
555 passengers in a
three class arrangement.
It has one third more
seating capacity than a
Boeing 747 and is
produced by a company
Inside the Airbus
1. Model of a possible first
class area.
2. A model of a bar area on
the new airbus.
3. A model of an onboard
duty free.
4. Other
features
will
include;
gymnasium,
sleeper cabin, crèche,
casino.
Orders to Date
Airline
No of Aircrafts
Emirates
43
Lufthansa
15
Quantas
12
Air France, Singapore Airlines, FedEx,
International Lease Finance, UPS
10
Thai Airways, Virgin Atlantic, Malaysia
Airlines
6
China Southern Airlines, Korean Air
Lines, Kingfisher Airlines
5
4
Qatar Airways
2
Total Ordered
159 Aircrafts
Timeline of A380
• November 2000 – First A380 order received. Airbus says
that it needs to sell 250 of them to break even.
• March 2005 – Airbus admits that 270 aircraft needed to
break even.
• June 2006 – Deliveries delayed by 6 months.
• 3 October 2006 – Another 18 month delay (airbus will lose
£3.36 billion).
• 19 October 2006 – Airbus need £40 billion worth of
orders to break even. Break even point now at 420 aircraft
only 159 on the books.
What is Break Even?
• Break even analysis investigates the minimum output and
sales that a company requires in order for its revenue to
cover its costs.
• At a zero level of output, the company will incur fixed costs
(e.g. buildings and machinery) without any revenue from
sales and so will make a loss. As the company begins to
produce, it will incur variable costs (e.g. raw materials and
wages), but it will also begin to receive revenue from sales.
• Assumptions of break even analysis;
– The selling price will remain the same regardless of the number
of units sold.
– Fixed costs remain the same regardless of the number of units
of output.
– Variable costs will vary in direct proportion to output.
Calculating Break Even
To calculate break even the following formula is used;
Break Even Output =
Fixed Cost (£)
Contribution Per Unit (£)
Thus a product with a price of £12 and variable costs of £6 will
contribute £6 for every unit sold. If fixed costs are £2,500,
how many units will need to be sold to break even?
Break Even Output
=
=
=
=
Fixed Cost
Contribution Per Unit
2,500
12-6
2,500
6
416.666 or 417 1.d.p
```