How Do you - Use a Break Even Analysis

A break-even analysis can provide the information required for the owner to make decisions. Break-even analysis involves estimating the level of sales necessary to operate a business on a break-even basis. It indicates what you as the business owner need to sell and what sales levels are required to cover your costs of doing business.

Usually the sale price for a product or service will more than cover the variable costs (the direct costs) of producing that product or service, but you must always remember that the margin or the excess income from those sales must be enough to cover the fixed costs of the business as well.

It is only by performing a break-even analysis that the factors behind the profit potential of a business will become clearer. This process of analysis will highlight the factors that are the most significant and the assumptions (as to correctness or otherwise) in the owner’s business plan.

An analysis will enable the manager to determine the following:

• How profitable a product is.
  
  
• How many units will have to be sold before profitability is reached?
  
  
• What minimum sales are required before losses...

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