What is the purpose of break even Analysis?

Expert Solution

Break-even analysis, one of the most popular business tools, is used by companies to determine the level of profitability. It provides companies with targets to cover costs and make a profit. It is a comprehensive guide to help set targets in terms of units or revenue.

The main purpose of break-even analysis is to determine the minimum output that must be produced for a business to be in postion of No Profit or No Loss. It also is a rough indicator of the earnings impact of a marketing activity.

Break-even analysis is an important aspect of a good business plan, since it helps the business determine the cost structures, and the number of units that need to be sold in order to cover the cost or make a profit. Even after a business has been set-up, break-even analysis can be immensely helpful in the pricing and promotion process, along with cost control.

Break-even point can be determined by calculating the point at which revenue received equals the total costs associated with the production of the goods or services.

Break-even Point = Fixed Costs/ (Unit Selling Price – Variable Costs)

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ekkarill92 answered 2 years ago

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