Student Report Template: Break-even Analysis for a Business
Organization
Title:
Break-even Analysis for a Business Organization: Surf’s Up Case Study
Name: Judi Akramah
Introduction
Break-even analysis serves an essential tool for businesses such as Surf’s
Up, as it determines the point where total revenue matches total costs,
indicating that the business neither profits nor suffers losses. This analysis is
vital for understanding the relationship between costs, revenue, and
profitability. For Surf’s Up, which is contemplating expanding their business
product wise and or expanding their premises, break-even analysis will
inform crucial financial choices, including pricing strategies and sales
objectives. By understanding this stability, the café can effectively plan for
growth, manage risks, and ensure sustainable profitability as it explores new
opportunities.
Section 1: Purpose of Break-even Analysis
Guiding Question: Why is break-even analysis important for a business like
Surf’s Up?
Break-even is important for Surf’s Up because it helps with pricing strategies
in setting the right prices for items not only in attracting customers but also
in insuring that they have made profit as well as cost control, it shows the
relationship between costs, pricing and sales which makes it easier to
identify and reducing business expenses to increase profits.
Financial Planning:
Break-even analysis assists Surf’s Up in establishing achievable sales
objectives. By determining the sales volume necessary to cover both
fixed and variable costs, the café can formulate a strategic plan for
daily, weekly, or seasonal targets. This understanding enhances
budgeting and allows for effective prioritization of expenses.
Profitability Forecasting:
Surf’s Up can utilize break-even analysis to predict when it will begin to
earn profits. Knowing the break-even point is essential for evaluating
the time needed to recoup initial investments and start realizing
returns, which is particularly beneficial for planning seasonal changes
or promotions to enhance sales.
Risk Assessment:
(Discuss how break-even analysis helps evaluate the risks associated
with new business ventures or expansions.)
Decision-making:
(Talk about how businesses use break-even analysis to make informed
decisions about pricing, costs, and sales strategies.)
Section 2: Calculating Break-even
Guiding Question: How do you calculate the break-even point using
financial data?
Formula to Use:
Break-even point = Fixed costs ÷ (Selling price per unit – Variable cost
per unit)
Data Provided for Surf's Up:
o Fixed costs: $3,000
o Variable cost per Surfer’s Breakfast: $4.00
o Selling price per Surfer’s Breakfast: $8.00
Calculation Formula:
Result:
Surf’s Up needs to sell 750 breakfasts to cover all costs.
Show Break Even Point as a graph
Section 3: Impact of Changes in Costs and Revenue (B.M1)
Guiding Question: How do changes in costs or revenue affect the break-
even point?
Changes in costs and revenue to higher costs (fixed or variable) raises the
break-even point, whereas higher revenue (selling price per unit) lowers it.
Scenario 1: Reduced Fixed Costs
o New fixed cost: $2,500
o Break-even point calculation:
Surf’s Up needs to sell 625 breakfasts to cover all costs.
show Break Even Point as a graph
Scenario 2: Increased Selling Price
o New selling price: $10.00
o Break-even point calculation:
Surf’s Up needs to sell 500 breakfasts to cover all costs.
show Break Even Point as a graph
increasing the selling price lowers the break-even point because
it increases the amount of money earned from each unit sold,
meaning you need to sell fewer units to cover fixed costs.
Section 4: Importance of Break-even Analysis
Guiding Question: Why is break-even analysis important for making
business decisions?
Strategic Planning:
Break-even analysis is a valuable resource that allows you to identify
the specific moment when the business, or a new product or service
that the business is launching, will start generating profit. By
understanding this critical point, the business can make informed
decisions about pricing, costs, and overall financial strategy to ensure
the business’s journey succeeds. This analysis is key for informing
decisions related to business growth, helping in pinpointing when new
initiatives will start generating profit, companies can strategically plan
their expansion. This approach helps ensure that growth efforts are
both financially viable and sustainable.
Assessing New Ventures:
Breakeven analysis plays a vital role in evaluating new business
opportunities, such as launching hot food services. To perform this
analysis, start by identifying all fixed and variable costs, then calculate
the breakeven point to find out how many units must be sold to cover
these costs.Financial indicators, like profit margin, are important for
assessing the possibility of new services. Additionally, examining case
studies of successful operations can offer valuable insights into best
practices and potential challenges, helping businesses make well-
informed and financially responsible decisions for expansion.
Cost Control and Pricing Strategy:
Break-even analysis helps businesses in cost control and pricing
strategy by identifying the minimum sales needed to avoid an area of
losses. It guides decisions to cut unnecessary expenses and streamline
operations. By understanding the break-even point, companies can set
prices that cover costs and achieve ideal profit margins. For example,
calculating the break-even point involves considering fixed and
variable costs, which can lead to strategic choices to cut costs and
adjust prices.
Limitations:
assuming fixed costs and prices can be unrealistic because market
conditions often shift, impacting profitability. Overlooking external
factors such as economic shifts, competition, and consumer behavior
can lead to an incomplete analysis. Besides, failing to consider variable
costs that change with production levels can lead to inaccurate
forecasts. It's crucial to recognize how these factors affect decision-
making for effective financial planning.
Conclusion
Break-even analysis is a needed financial tool that helps businesses like
Surf’s Up Café arrange realistic pricing, control costs, and make well-
informed strategic choices. By identifying the break-even point, Surf’s Up can
set prices that not only draw in customers but also ensure profitability,
allowing for better expense management and profit enhancement. This
analysis aids in financial planning by defining clear sales goals and helping
the café predict profitability across different scenarios. Although it has some
limitations, such as the assumption of fixed costs, break-even analysis is
crucial for evaluating risks, assessing new opportunities, and guiding
decision-making. With this perception, Surf’s Up Café can adapt to market
changes, enhance its operations, and push for sustainable growth.
References:
(Include any references or data sources you used in your analysis.)
https://gocardless.com/guides/posts/what-is-break-even-analysis/
#:~:text=Put%20simply%2C%20break%2Deven%20analysis,investment
%20and%20start%20making%20money.
https://accountancycloud.com/blogs/master-the-break-even-analysis-
ultimate-guide
https://www.costperform.com/cost-analysis-and-price-setting/
https://smartasset.com/financial-advisor/financial-planning-explained
https://www.ionos.com/startupguide/grow-your-business/profitability-
forecast/#:~:text=Definition,taxes%2C%20depreciation%2C%20and
%20interest.
https://www.smartsheet.com/business-decision-making-process#:~:text=The
%20decision%2Dmaking%20process%20involves,that%20occur%20when
%20making%20decisions.
https://www.fsb.org.uk/resources-page/a-guide-to-risk-
assessment.html#:~:text=A%20risk%20assessment%20is%20the,record
%20your%20findings%20in%20writing.
