A breakeven analysis is used to determine how much sales your business needs to start making a profit. Every business wants and needs to make a profit but the only way you can determine if your product or service is profitable is by conducting a break-even analysis. This is a tool used by companies to understand how many products they have to sell in order for the company to break even. However, for you to understand how to come up with the breakeven analysis, you first need to understand the process of the pricing methods that contribute to the break-even point. First you need to come up with a profitable pricing method at which you can sell your product for. There are three ways to approach pricing.
The first is cost based pricing which determines the price based on the cost of creating the item .The second, is demand based pricing which basically determines the price based on what the market is willing to pay. Finally, competition based pricing which is based on what your competitors are charging. Now that you have a price structure you can begin the break even analysis. When conducting a break-even analysis, you will have to determine what your fixed costs and variable costs are. Your fixed costs are costs not directly related to the level of production. Fixed costs don’t change on a monthly basis, things like rent, insurances, production of your products and utilities. Your variable costs are costs that change on a monthly basis. Some of your variable cost may include gas, marketing, or sales commissions. Your variable cost is lower when there is less production or lower sales and higher when there is more production or higher sales.
The Essay on Importance of Break-even analysis
It is an undisputable fact that every business’ objective is to survive and make profit as compensation of being in existence. Frankly, predicting a precise amount of sales or profits is nearly impossible. No business aims at making losses whatsoever. Given this, a person starting a new business often asks, ‘’ At what level of sales will my company make a profit? ’’ This question clearly predicts ...
To calculate your break-even point you will need to divide the fixed costs from the unit’s price. Then you will minus the variable costs that will give you the amount of units to sell in order to break even or make a profit.
