Advanced Search

Changing Plans

We mentioned at the outset of the resource that break-even was a planning tool. Let us assume that Fruit28 have produced the break-even chart with the price set at £2.60. They have worked out that they need to sell around 133 pieces of fruit each week to break even (found by using the calculation method). They are a bit concerned that 133 pieces of fruit sounds quite a lot, and so are wondering what would happen if they increased the price.

Fruit28 know, however, that if they do increase the price then it might put some people off buying fruit. They have found that they will have to sell less fruit but are not fully confident that there will be enough people willing to pay the £2.90. They wonder what would happen if they reduced the price from £2.60 to £2.30?

The price that is charged has an impact on the level of total revenue and therefore on the break-even level of sales needed. Copyright: Megan Stevens, from stock.xchng.

They can experiment with a whole range of different prices using this model. They would not want to charge a price less that £2.15 however - why do you think this is? (This is relevant to the later question on the Channel Tunnel!)

Experimenting with these different price levels will give Fruit28 a clearer picture of their position. They can then use knowledge of their market to make a decision about the appropriate price to charge - this will include an understanding of the likely break-even level of sales and also what sort of price they think is appropriate for the sort of customers they have.

The diagram can also be used to show the effect on the likely break-even level of sales at different prices as follows.

Changing Costs

Of course, it is not only price that can change; costs can as well. The cost of buying the fruit could rise or fall and some of the fixed costs could also change (remember that the word 'fixed' in fixed costs just refers to the fact that these costs do not depend on the amount produced/sold).

It is quite possible that a firm might have to re-calculate their costs structures if things like insurance costs, administration costs, advertising and rent rise or fall. In our example, we might face a rise in costs for delivery or the maintenance on the shed might rise. We would have to factor these into our calculations, but break-even analysis allows us to see what the impact of these changes might be on our expected break-even level of sales.

| Index | Previous | Next |