Break-even analysis is an important aspect of a good business plan, since it helps the business determine the cost structures, and the number of units that need to be sold in order to cover the cost or make a profit.Break-even analysis is usually done as part of a business plan to see the how practical the business idea is, and whether or not it is worth pursuing.Even after a business has been set-up, break-even analysis can be immensely helpful in the pricing and promotion process, along with cost control.
It provides companies with targets to cover costs and make a profit.
It is a comprehensive guide to help set targets in terms of units or revenue.
If company produces zero tires, the total variable costs comes down to $0 (10*0).
On the other hand, if the company produces 500 tires, the total variable costs comes down to $5000 (500*10).
Just as the acrobat has a daunting task of balancing their weight, so too does the owner of small business when accurately assessing costs against sales.
Let’s examine some top tips from the professionals at Small Business Association and If you are considering jumping into the “circus ring” and starting your own business, one of the most important business planning tools is a Break-even Analysis that can help you determine how soon your business will be profitable and be able to cover all expenses.
Beyond this point, every additional unit sold will result in increasing profit for the business.
The increase in profit will be by the amount of unit contribution margin, which is the amount of additional revenues that goes towards covering the fixed costs and profit.
It can be calculated as follow: Unit Contribution Margin = Sales Price – Variable Costs There are two distinct nature of costs that a business has to incur in its normal operational activities: These costs stay the same regardless of how many units the company is producing.
These include start-up costs, and other capital expenses which do not have to be paid periodically.