Break Even Analysis

Breakeven analysis is a powerful management tool, and one that is critical in planning, decision-making, and expense control. Breakeven analysis can be invaluable in determining whether to buy or lease, expand into a new area, build a new plant, and many other such considerations. Breakeven analysis can also show the impact on your business of changing your price structure. As the price goes down (and so your gross margin goes down), breakeven shoots up - usually very rapidly. Breakeven analysis will not force a decision, of course, but it will provide you with additional insights into the effects of important business decisions on your bottom line.

Breakeven refers to the level of sales necessary to cover all*…show more content…*

Any close decision will probably be affected by other factors in addition to these calculations anyway.

Once you know the level of sales you have to reach before making a profit, you can evaluate the reasonableness of this target. What are the odds of reaching this breakeven sales level? One way to test this is to convert the gross dollar sales needed for breakeven into some other unit which can then be compared against the capacity of the business or the size of the market. If the breakeven occurs at or near the capacity of the business, or if your analysis shows that you must capture all (or more than all) of the available target market, the feasibility of your concept is suspect, and the odds of business success are loaded against you.

Another way to use breakeven analysis is to change the variables in the equation. If fixed or variable expenses can be reduced, the breakeven point will go down. If prices can be increased without hurting sales (and without increasing costs), the breakeven point will go down. This is an excellent way to experiment with different alternatives. Clearly, this is a subjective process - but then, so is the rest of business analysis. The purpose is to make your business decision making as reasonable as possible. Breakeven analysis can be one of the most valuable tools at your disposal for this

Breakeven analysis is a powerful management tool, and one that is critical in planning, decision-making, and expense control. Breakeven analysis can be invaluable in determining whether to buy or lease, expand into a new area, build a new plant, and many other such considerations. Breakeven analysis can also show the impact on your business of changing your price structure. As the price goes down (and so your gross margin goes down), breakeven shoots up - usually very rapidly. Breakeven analysis will not force a decision, of course, but it will provide you with additional insights into the effects of important business decisions on your bottom line.

Breakeven refers to the level of sales necessary to cover all

Any close decision will probably be affected by other factors in addition to these calculations anyway.

Once you know the level of sales you have to reach before making a profit, you can evaluate the reasonableness of this target. What are the odds of reaching this breakeven sales level? One way to test this is to convert the gross dollar sales needed for breakeven into some other unit which can then be compared against the capacity of the business or the size of the market. If the breakeven occurs at or near the capacity of the business, or if your analysis shows that you must capture all (or more than all) of the available target market, the feasibility of your concept is suspect, and the odds of business success are loaded against you.

Another way to use breakeven analysis is to change the variables in the equation. If fixed or variable expenses can be reduced, the breakeven point will go down. If prices can be increased without hurting sales (and without increasing costs), the breakeven point will go down. This is an excellent way to experiment with different alternatives. Clearly, this is a subjective process - but then, so is the rest of business analysis. The purpose is to make your business decision making as reasonable as possible. Breakeven analysis can be one of the most valuable tools at your disposal for this

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