Last Updated 20 Apr 2022

Evaluate Break-Even Analysis as a Decision-Making Tool

Category Finance
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3. 3 Evaluate break-even analysis as a decision-making tool. The definition of the Break-even analysis: The break-even analysis is an analysis of a product or company’s sales required to neither lose money nor make a profit, but simply to cover costs. Explain in mathematical term: total revenues – total costs = 0. The methods: By using a break-even formula or by drawing a break-even chart. Why is it so important using a break-even analysis?

Because it gives vital information about a business or a company’s financial status, not just for a simple break-even point. For start-up businesses, it determines how businesses are setting-up prices for their projections to achieve a reasonable level of break-even point and safety margin. For an on-going business, it equally vital for review analysis and forecast its break-even point; as, how can it improve the relationship between fixed costs, variable costs and revenues and justify a right decision to achieve an ultimate result for a healthy business.

Although it’s simple and easy to set-up, yet fundamentally it’s an essential decision-making tool for analysing all forms of businesses. For example: 1. Increase prices to raise total revenues, it creates a lower break-even point and better safety margin. 2. Reduce fixed costs or variable costs and prices remain the same also can lower the break-even point. 3. Reduce selling prices and variable costs to generate more sale revenues; equally it can lower the break-even point.

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Related Questions

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What is break even analysis in business?

Break-Even Analysis: What, Why, and How. 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.

How do I classify my costs for breakeven analysis?

To classify your costs for breakeven analysis - assign them as variable if they are incurred by making a sale, and if the cost would have been incurred anyway, it is fixed. Once you understand your costs - you can work out your breakeven point. Your breakeven represents the point at which you have no net loss or profit.

Why is break-even important in decision making?

It is particularly useful for making decisions about: Pricing – break-even can be used to see how different pricing strategies might affect the break-even point, and the potential profits of a business. Charging a higher price might increase revenue, and this could lower the break-even point.

What is break-even analysis 3rd grade math?

3. 3 Evaluate break-even analysis as a decision-making tool. The definition of the Break-even analysis: The break-even analysis is an analysis of a product or company’s sales required to neither lose money nor make a profit, but simply to cover costs. Explain in mathematical term: total revenues – total costs = 0.

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