Break Even Analysis.

“Cost-Benefit Analysis”.

Break Even Analysis. 1

What is Break-Even Analysis?

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 Break-Even Analysis.
o Break-even analysis is a useful tool to study the relationship between fixed
costs, variable costs and returns.
o A break-even point defines when an investment will generate a positive return
and can be determined graphically or with simple mathematics.
o Break-even analysis computes the volume of production at a given price
necessary to cover all costs.
o Break-Even Analysis is the initial judgement on whether the project is viable
or not.
oBreak-even analysis is an essential tool for any business. All the initial decisions
related to the launching of a new product or technique are dependent upon it.
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Needs for Break-Even Analysis.

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The Need for Break-Even
Analysis.

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Benefits of Break-Even Analysis.

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Benefits of Break-Even
Analysis.

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Break Even Point.

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 Break-Even Point.
o Break-even point is that point of sale where the revenue generated by the
company is equal to the total cost incurred by it.
o It is a position where the organization is at a no-profit no loss situation.
o Break-even analysis is most useful when used with partial budgeting or capital
budgeting techniques. The major benefit to using break-even analysis is that it
indicates the lowest amount of business activity necessary to prevent losses.

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Graphical Representation of
Break-Even Point.

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Graphical Representation of
Break-Even Point.

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How to calculate Break-even
Point.

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Calculation of Break-Even
Point.

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Break Even Point For New
Business.

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Break Even Point for New
Business.

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 Break-Even Point for New
Business.
o For any new business, this is an important calculation in your business plan.
Potential investors in a business not only want to know the return to expect on
their investments, but also the point when they will realize this return. This is
because some companies may take years before turning a profit, often losing
money in the first few months or years before breaking even. For this reason,
break-even point is an important part of any business plan presented to a potential
investor.
o For existing businesses, this can be a useful tool not only in analyzing costs and
evaluating profits they’ll earn at different sales volumes, but also to prove their
potential turnaround after disaster scenarios.
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Calculating the Break Even Point
for any business.

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 Break-Even Analysis for New
Business.
o This analysis will help you easily prepare an estimate and visual to include in
your business plan.
o you will need is an idea of the following information:
Business’s estimated Fixed Cost.
Business’s estimated Selling Price Per Unit.
Business’s projected Unit Sales.
Business’s estimated Variable Cost per unit.

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Formula of Calculating Break
Even Point.

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Fixed Cost.

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Fixed Cost.

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Variable Cost.

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Variable Cost.

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Average Unit Price.

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 Average Unit Price.
o Average unit price is the amount you will charge your customers to buy one unit
of your product. Setting the right price for your products is crucial to your
business’s success as well as your breakeven analysis. The price of your product is
what will determine when your startup will begin to turn a profit. To learn how to
price your product, look at your competition and how they price their products.
You can also create focus groups with potential customers to see how consumers
accept the price of your products. After you’ve figured out how much it costs to
produce one unit of your product and you’re still unsure of the exact amount to
charge, a breakeven analysis can help.

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Calculator used for Calculating
Break Even Point for any
Business.

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Calculating Break Even Point.

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 Calculating Break Even Point.

https://www.sba.gov/breakevenpointcalculator#:~:text=The%20break%2De
ven%20point%20is,the%20revenues%20for%20a%20product.

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Practical Example.

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 Practical Example.
o Suppose you want to start a new business. You decides to start a small bakery and
sell your home-made baked cake.
 First: you need to determine the estimated fixed cost of your project. You
have $1,000 per month of fixed costs (bakery rent and equipment and utilities).
 Second: you need to determine the estimated variable cost of your project.
Your variable costs for the baked goods are $30 for labor and materials.
 Third: you need to determine the estimated selling price per unit. You’d like
to charge $50 per cake since that’s the going rate in the area for home-made cakes.

Breakeven point = $1,000 / ($50-$30) = $1,000 / $20 = 50 cakes.

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 Practical Example.
o This means you’d need to sell 50 cakes each month at $50 per cake to break even.
o Startup owners can use this breakeven formula to compare different pricing
strategies to analyze which price points will work best. The higher you make your
prices, the harder it may be to attract buyers, but if you keep your prices low,
you’ll have to sell more products to turn a profit. You can also examine the
differences in your breakeven point if you can decrease your variable or fixed
costs. To be able to investigate these different scenarios, use these free and helpful
breakeven templates online.

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