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Break Even Analysis Notes

The break-even point is the point at which total revenue and total cost are equal. Break-even analysis determines the number of units or amount of revenue needed to cover costs. It can help mitigate risk and set revenue targets by providing the sales level required for profits. Multiproduct break-even analysis is needed when companies have multiple products with varying costs and revenues.

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20 views

Break Even Analysis Notes

The break-even point is the point at which total revenue and total cost are equal. Break-even analysis determines the number of units or amount of revenue needed to cover costs. It can help mitigate risk and set revenue targets by providing the sales level required for profits. Multiproduct break-even analysis is needed when companies have multiple products with varying costs and revenues.

Uploaded by

nashwa.tariq24
Copyright
© © All Rights Reserved
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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What is the break-even point?

The break-even point is the point at which total revenue and total cost are equal. Break-
even analysis determines the number of units or amount of revenue that’s needed to cover
your business’s total costs. At the break-even point, you aren’t losing or making any money,
but all the costs associated with your business will have been covered. After breaking even,
the sales made by your business are pure profit. Put simply, break-even analysis helps you
to determine at what point your business – or a new product or service – will become
profitable, while investors also use it to determine the point at which they’ll recoup their
investment and start making money.

Why is it useful?

It can be an excellent tool to use when you’re starting up a new business, as it helps you to
decide whether the idea is viable. Plus, it provides you with information you can use when
designing your pricing strategy.

Benefits Problems

 Mitigate risk – Sometimes, business  Doesn’t predict demand – Although


ideas just aren’t meant to be a break-even analysis can tell you
pursued. Break-even analysis can when you’ll break even, it doesn’t
help you mitigate risk by avoiding give you any insight into how likely
investments or product lines that that is to happen. Plus, demand isn’t
aren’t likely to be profitable. stable, so even if there’s a gap in the
market, the actual break-even point
could be higher than the forecast.

 Setting revenue targets- doing a  Depends on reliable data – In short,


break-even analysis can be a great the accuracy of your break-even
tool for setting sales targets. It gives a analysis is dependent on the accuracy
clear quantity and price with a of your data. If your calculations are
timeframe in place, to decide on wrong or you’re dealing with
revenue targets. fluctuating costs, break-even analysis
may not be the most useful tool.
 Pricing – Break-even analysis gives  Ignores competition – New entrants
you a much more solid basis from to the market could affect demand
which to price your products. for your products or cause you to
change your prices, which is likely to
affect your break-even point.
What is the main difference between single product break even and multiproduct break-
even analysis?

Calculating the break-even point in CVP analysis is easy if variable and fixed costs are set. A
problem arises when the company sells more than one type of product. For companies that
produce more than one product, break-even analysis may be performed for each type of
product if fixed costs can be determined separately for each product. However, fixed costs
are normally incurred for all the products that’s why we need multi-product break-even
point.

What is multiproduct breakeven analysis?

Companies price each one of their products or services differently, and the costs associated
with each of those products or services vary as well. In addition, companies have limited
resources, such as time and labor, and must decide which products to sell or produce and in
what quantities, or which services to offer in order to be the most profitable. That’s why its
important for these companies to use multiproduct even analysis to analyze the sales mix
required to break-even. A sales mix represents the proportions of the products that a
company sells—in other words, the percentage of the company’s total revenue that comes
from product A, product B, product C, and so forth.

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