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Break Even Analysis Paper

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Break Even Analysis Understanding when a Company will begin to make a profit is a very important tool for businesses. An excellent method for determining profit based on sales and expenses is a break even analysis. It is useful for new businesses in determining start-up costs, introducing a new product line, changing price structure, adding a new fixed expense or determining whether or not to add a lower or higher priced component to a product, effectively changing the variable cost. In order to determine the break-even point, we have the option to analyze the numbers in terms of unit sales or overall sales dollars. The formula for determining unit sales to break even is: Unit Sales to break even = Fixed Expenses Unit CM Additionally, we can look at the formula for determining Sales dollars to break even by analyzing the following formula: Dollar Sales to break even = Fixed Expenses CM Ratio These two formulas use expenses to determine how much revenue a company needs to generate in order to cover all costs. Expenses include fixed expenses that do not change based on the number of products sold, such as rent or salaries. It also includes the variable expenses that change depending on how many items are sold in a given period such as a component part to …show more content…

If a CEO is considering a particular advertising expense, a fixed expense, to generate additional sales, we can use the formula to determine if the expense will be profitable for the company. Another useful analysis could be whether or not to choose a higher quality component part of a product. The higher price of the component will lower the CM if the price is not increased, therefore reducing profit if sales are not increased by changing the quality and making the product more attractive for consumers. As mentioned previously, we can look at these numbers in terms of units sold or overall sales

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