Analyse how a business might use break-even analysis when planning to launch a new product.

Mark scheme

Marking points from the official mark scheme (Feb/Mar 2018). The mark or mark type is shown in brackets.

1. [8] Break-even analysis uses revenue, fixed costs, and variable costs at different production levels to show at what point the business will make neither a loss nor a profit. This can be shown on a graph or in a calculation (BE = FC/R–VC).
2. [8] For a business planning to launch a new product, it reveals the required output or sales volume to achieve profitability, based on predicted revenues and costs, though it relies on accurate calculations of fixed and variable costs.
3. [8] It helps assess the new product's viability, informing the go/no-go decision for launch, and acts as a crucial planning tool.
4. [8] Break-even analysis clarifies the level of risk involved in the launch of the new product, aiding in risk management and decision-making.
5. [8] A favourable break-even analysis can be used to persuade potential lenders/investors to provide finance.
6. [8] It promotes cost control by monitoring expenses and revenues, though the analysis needs periodic amendment as costs change over time.
7. [8] The margin of safety, derived from break-even analysis, indicates how much sales can drop before incurring a loss, which is vital for anticipating early problems.
8. [8] Candidates may also consider the limitations of break-even analysis, such as its reliance on assumptions.
9. [12] Directors must understand various sources of finance, including bank loans, overdrafts, share capital, venture capital, trade credit, sale of assets, retained profit, and crowd funding.
10. [12] Factors influencing the choice of funding include business ownership, profitability, the amount and term (short/long) of finance needed, its purpose, ease of obtainability, cost of finance, attitude to risk, and impact on business control.
11. [12] As a limited company, a pharmaceutical firm can raise share capital, though this may dilute existing ownership and control.
12. [12] A strong track record of success and recognised brands make borrowing easier; as a PLC, it can issue new shares for substantial funding.
13. [12] Economic conditions matter; borrowing is easier in a boom when confidence is high, and high interest rates make debt expensive, favouring retained profit if available, which incurs no interest.
14. [12] For significant short-term funding, overdrafts (high interest) or retained profit (no interest) are options, requiring quick returns to justify. Selling unneeded assets or sale and leaseback might provide small, short-term cash injections, but may not be ideal for a growing business that needs assets.
15. [12] The most suitable finance options will depend on a thorough analysis and evaluation of these factors within the specific context of the pharmaceutical company's growth plans and market conditions.