Break-even analysis is a crucial financial tool for businesses to determine when they can cover expenses with sales revenue. It involves calculating the break-even point, understanding fixed and variable costs, and assessing the contribution margin. This analysis aids in decision-making for pricing, cost management, and setting sales targets to achieve desired profits. The margin of safety and target profit are also key metrics for financial security and strategic planning.
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The point at which total costs equal total revenue, indicating neither profit nor loss
Essential for entrepreneurs and managers to determine minimum sales needed for sustainability
Calculated by analyzing fixed and variable costs in relation to sales volume
Costs that remain constant regardless of production levels
Costs that vary directly with production
The sum of fixed and variable costs
The difference between selling price per unit and variable cost per unit
Calculated by dividing total fixed costs by contribution margin per unit
A visual representation of the relationship between costs, volume, and profits
Indicates how much sales can decrease before reaching the break-even point
The expected profit a business aims to achieve within a certain period
Provides understanding of financial implications and aids in decision-making
Assumes all units are sold and constant unit price and variable cost, may not be effective for diverse products
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The ______-______ point is where a business's total costs are equal to its total ______, indicating neither profit nor loss.
break-even
revenue
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Fixed Costs - Definition
Expenses unchanged by production levels, e.g., salaries, rent.
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Variable Costs - Relation to Production
Costs that vary in direct proportion to production, e.g., materials, labor.
