A new business idea or a startup needs some practical analysis before beginning. It is the part of Cost-Volume-Profit Analysis, that describe the percentage of sales at which incomes equals expenses of your business thus showing a zero net income. It is useful to determine the position of organization or your new services or products will be going to be profitable or not. The concept of break-even analysis is tough to understand and here, economics assignments help from BookMyEssay works.
It is a financial calculation used to describe the basics number of sell to cover your costs of the project. This is the best method to calculate that your business is neither losing money nor making any profit. It gives you a more practical approach to start the new product or new business idea. Sometimes CVP analysis is referred to as break-even analysis, but the fact is that the break-even analysis is just one part of profit planning analysis.
Within performing this calculation, you can make a more informed decision regarding the investment and start point of profit.
Break-Even Point = Fixed Costs (Necessary Expenses)/ (Price of Product – Variable Costs Per Unit)
Fixed cost is the term which is the basics expenses you could not cut. Fixed cost will be the same no matter how much will sell. Like as the employees’ salaries, rent, services and interest paid and infrastructures cost.
And on other hand variable coast is the expenses of organization which could vary according to a number of production. And that will include the Raw material, distribution costs, packaging, taxes, promotion cost. These things vary according to the production of your services of products.
Examples: Let take an example of produces of High-end electronic security locks with cost of the $ 50, on top of the 5000 of fixed costs and your sale price is $200 then
Break-even point= 5000/(200-50)= ~33.333
You need to sell minimum 34 locks to reach at that point to cover the expenses.
This calculation will help you to determine the minimum price tag of products to avoid any mistake. Sometimes using the high price tag will certainly allow reaching early on break-even point but generally, it is not realistic. It is completely depending upon the brand building. If you have enough names in the industry, then it is a good strategy but if you are newcomer than start from low is the better choice.
Break-even analysis is the great tool for management of an organization. It helps managers to think wide on future planning with all risks and phases, which will at time of practical application of project. Many decisions like the number production, modifying product or services or increasing the new productions alien are all dependable on these analyses. In economics, the profitable analysis is major planning.
Break-even study can also help trades see where they could re-structure or cut costs for the better result in future. No doubt the businesses become more operative and achieve higher revenues with the application. It has been observed with the time that an empire-building venture is seeking to get off of the ground. Include that they formulate a break-even investigation to suggest to potential financial sponsors for their businesses, which is the business that has the potential to be feasible and at what points.
Restrictions With Breakeven Point Calculation
This application will give you only one side story. It will not tell you about the sales are actually likely to be in future. Many things vary time to time because in long run many more factors are here to needed to consider for better and potential results in businesses.
- Popular multi-product companies need to cover the relative proportions of each manufactured goods sold and produced are constant.
- On undertakes that the quantity of goods and chattels produced is equal to the measure of sold
- On analysis, it is considered that fixed costs (FC) are constant always. Even though it is not practical in long run business, future high production is likely to cause fixed costs to rise.
- Per unit of output of business would vary because of many factors but it considers equals.
With the application of breakeven point, you need to consider all aspects which left behind and make the decision according to that.
If you don’t understand the basic logic of break-even analysis and you have an assignment for economics on the same topic then, always consider BookMyEssay. BME helps you out in your economics assignment and also you can get custom assignment writing help for any type of assignment topics.