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The break-even analysis is an easy but controlling method for understanding the profitability
of your business. The Break-even Point for a business is the sales volume or sales value
where the business neither makes a profit or a loss but is said to break even.
To calculate the break-even point for a business the following elements are essential:
Break-even point (for output) = fixed cost divided by contribution margin per unit
Contribution margin per unit = selling price per unit - variable cost per unit
Break-even point (for sales) = fixed cost divided by contribution margin ratio
Limitations
Break-even analysis is only a supply side (i.e. costs only) analysis, as it tells you
nothing about what sales are actually likely to be for the product at these various
prices.
It assumes that fixed costs are constant.
It assumes average variable costs are constant per unit of output, at least in the
range of likely quantities of sales (i.e. linearity).
It assumes that the quantity of goods produced is equal to the quantity of goods
sold (i.e., there is no change in the quantity of goods held in inventory at the
beginning of the period and the quantity of goods held in inventory at the end of
the period).
In multi-product companies, it assumes that the relative proportions of each
product sold and produced are constant (i.e., the sales mix is constant).
References
Book(s)
Website(s)
http://businesscoaching.typepad.com/the_business_coaching_blo/2008/06/break-even-
analysis---cost-volume-profit-analysis.html. Accessed on November 5, 2009.