Tuesday, 31 January 2012

Importance of break even analysis

Break-even analysis
Break-even analysis is a technique to establish the effect on profit of different sales volumes and
different costs and selling price levels. The break-even point is the volume of sales at which sales
enable costs to be covered and no profit or loss is made - in other words, you break even.
Break-even analysis can be a very useful management tool because it enables a manager to
determine the following things:

• The profitability of the present product line.
• How far sales can decline before losses will be incurred?
• How many units have to be sold before it becomes profitable?
• What effects will the reduction in selling price or the volume of sales made have on the
profitability of the business?
• What will be the effect on profitability if overhead expenses increase?
• How much more has to be sold at current price levels to make up for an increase in the cost of
sales?

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