Break-even Analysis
What is break-even analysis and why is it important for businesses?
Break-even analysis determines the level of sales or activity at which a business neither makes a profit nor incurs a loss. It is important for businesses as it helps in setting sales targets, pricing decisions, assessing feasibility, and understanding the impact of cost and price changes on profitability.
How can businesses calculate the break-even level of output and sales revenue?
Businesses can calculate the break-even level of output and sales revenue by dividing their fixed costs by the contribution margin per unit. The contribution margin per unit represents the selling price per unit minus the variable cost per unit. The break-even level indicates the minimum level of output or sales revenue required to cover all fixed costs and achieve a breakeven point where there is neither profit nor loss.