BREAK EVEN ANALYSIS
A break even analysis is generally performed to determine the quantity of unit sales needed to cover an item's fixed costs in a given period. It can be performed at any time, however it will frequently be ran when an item is in development. Although calculating break even unit sales is the typical objective, unit sales, sales price, variable cost per unit, and total fixed costs can also be solved for if every other variable is known.
BENEFITS OF A BREAK EVEN ANALYSIS
A break even analysis can help your firm determine the viability of a particular item. It outlines the price and cost parameters that must be met in order for a product to break even. Beyond that, it also allows for comparison between items within a product line.
THE BREAK EVEN ANALYSIS PROCESS
- Determine the item(s) to be analyzed.
- Determine an appropriate means of classifying and allocating fixed and variable costs
- Solve for break even unit sales
- Evaluate the results and determine where adjustments can be made in the variables to obtain the desired result
- If appropriate, compare results between items in the same product line
FURTHER READING
These links elaborate on the topic at hand. They serve as a good starting point for those companies that would like to learn more or would like to address these topics “in house.” For those firms that prefer to continue to focus on their current responsibilities and would value the objective viewpoint of a professional from outside of the organization, click here.
Conducting a Break-Even Analysis
Excerpt: “Many entrepreneurs decide to completely discontinue a product or service after conducting this kind of analysis. They immediately see that it would be better for them to invest their time and money in producing and selling something else.”
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