Break-even Analysis Key Terms
Terms to know in order to perform a break-even analysisA break-even analysis helps business owners calculate the amount of product they must sell at a given price in order to break even, or cover all their costs. Having a break-even analysis performed, or performing it yourself, can also help you find better price points for various production costs.
A break-even analysis can be a complicated process. The following terms will help you as a business owner figure out what is involved in the process of performing a break-even analysis.
Fixed costYou must also determine fixed costs when calculating the breakeven point. These costs remain the same no matter how much labor or materials are used to produce the units. The number of units produced do not affect the fixed costs of the business. Location expenses, equipment costs and salaries are all examples of fixed costs.
Weatherhead School of Management offers a breakeven calculator, and explains how fixed costs are used to calculate the breakeven point.
Contribution margin or variable profitThe contribution margin is the variable profit produced by each unit. This margin is calculated by subtracting the average variable cost from the price per unit.
Sensitive profit and sensitivity analysisA sensitivity analysis examines the profit levels above and below the break-even point. The greater the proportion of fixed costs, the more sensitive the profit is. A sensitive profit is when a slight adjustment in sales has a big impact the profit.
Projected sales or expected unit salesThe total income realistically expected from unit sales during a specific period of time are your projected sales. If your business is just starting out, there are ways to research average projected sales. This information is key to calculating a realistic break-even point.
Margin of safetyThe margin of safety is used to represent how well a business is performing. It calculates the exact amount a business has gained or lost in reference to the break-even point.
Management and Accounting Web has a chapter that discusses cost volume profit analysis.
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