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What is Break Even Analysis?

Break-even analysis is a small-business accounting process for determining at what point a company, or a new product or service, will be profitable. It is a financial calculation used to determine the number of products or services you must sell to cover your production costs.

Table of Contents

Break Even Analysis Formula

To calculate the break-even point in units use the formula:

Break-Even point (units) = Fixed Costs / (Sales price per unit – Variable costs per unit)

or in sales dollars using the formula:

Break-Even point (sales dollars) = Fixed Costs / (Revenue – Variable Costs).

Why is Break Even Analysis Important?

If a business is to succeed, It must know very it’s income and expenses. The concept of defining this knowledge in dollars and production units helps greatly in forecasting. Many businesses do not know their numbers and ratios and move strongly to increase their sales without knowing at what point the business becomes profitable.

Are they making money on each sale or is the production cost too close to the sale price?

This seems obvious but is the downfall of many an enterprise.

The Margin of Safety

The Margin of Safety is the difference between Actual Sales and Break Even Sales.This must be reckoned as a number AND a ratio. It defines the planned resilience of the business. The difference between the target margin of safety and the actual margin of safety must be known very accurately.

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