THE REALITIES ABOUT POULTRY The Modern Farm - The Realities About Poultry_Seco | Page 160

Interpretation
1. Where sales revenue is greater than total cost it means that profits are being generated.
2. Where sales revenue is less than total cost it means that losses are being incurred.
3. Where sales revenue equals total costs (intersection of the sales revenue line and the total costs
line) it means that no profit or loss is occurring. This is the break-even point.
4.
Variable costs vary directly with output, as more output is produced then more variable costs are
incurred.
5.
Fixed costs do not vary with output and are constant for a range of output produced. They are
incurred even when there is no output at the beginning of the project. This is because they are
the costs that must be incurred to support the project such as equipment and facilities, rent and
interest incurred on any borrowed funds.
6.
The total costs line is a representation of the combined variable and fixed costs. This is why at
nil output it has a cost which represents fixed costs, and then as output increases the total cost
line varies with it and in parallel with the variable cost line.
7.
The margin of safety is the extra amount of sales that is expected to be generated when the
budget or actual sales is compared to the break-even level of sales.
Break-Even Analysis: Pros and Cons
Benefits (Pros)
 Break-even charts provide a clear, visual demonstration of some vital financial information.
They show at a glance break-even output and levels of profit or loss. This knowledge allows a
business to predict its likely profit from a certain output and to plan how many units (in this case
birds or eggs) it needs to produce and sell in order to reach a profit target.
 Break-even analysis is not a complex, expensive or time consuming process, and so could prove
particularly useful to those starting up or running a poultry business.
 Break-even charts can be used to show the likely financial impact of changes in costs or selling
price.
 Break-even can be used to model whether or not a new poultry business or poultry product
would be worthwhile before committing any resources into the venture.
 Break-even charts can be used to model ‘what if’ situations before any real resources are
committed to a business, project or poultry product.
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