Finding break even point of a product or service is an essential tool in choosing the best price per unit of a product and also helping to determine projected sales. Break even analysis can used for a number of different applications. Its basic function is to determine when a product or service will be profitable. This analysis can be applied to many other applications to determine a future forecast in sales, set a unit price and to target the best strategic options for the company.
Once the break-even figures are determined, the company can then use this information for other financial projections. The most common break even analysis applications and uses are:
1. Determining the point of profitability;
2. Finding the break even point for unit pricing;
3. Using the analysis information to choose the best company strategy.
Use break even analysis to determine the profitability of a product or serviceMany things should be considered when finding the break even point for a product's profitability. A company's goal is to be profitable as quickly as possible, so it is more effective for a company to run the numbers through a set of break even points to determine where the company will have the optimal chance of making a profit.
Harvard Business School provides a break even analysis toolkit that includes information and analysis tools to determine the break even point of any product or service. Business Tools provides a guide and calculator to perform basic break even analysis.
Use the analysis of break even point to set unit pricesPerforming break even analysis can also lead to the numbers that will help determine a set price per unit. This is calculated by leaving the cost per unit as the variable in a break even analysis equation. The most effective unit price will bring quick profitability to the company without the company spending too much for production and marketing of the product.
Bradley University provides information on all of the equations to determine break even analysis, including determining the break even cost, break even number of units and for setting the unit price. Bean Counter explains the relationships between cost, volume and profits in break even analysis.
Use the breaking even analysis to determine the best strategic optionsAnother use for break even analysis is to use the information from the analysis to help determine the company's financial strategy. If a company's profitability is determined by the success of one or more products, using the break even point for each product will provide a timeline for the company. This can be used to choose a better overall financial strategy that fits the projected costs and profits.
The Weatherhead School of Management provides information on break even analysis and how to use this analysis to help make strategic decisions. All Business provides a guide to use break even analysis for making business decisions and choosing the best strategies.