【A.01.00】What is Break-even Analysis?

Briefing Note
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Breakeven Analysis..

✅ ..a financial analysis tool for businesses.

✅ ..evaluates the relationship between the costs of producing and selling a product or service, and the revenue generated from sales.


An important concept in financial management and decision-making..

✅ ..helps businesses understand the minimum amount of sales volume, that is the minimum amount of sales quantity, and the minimum amount of sales revenue required to, at least, cover their costs and just break even, as well as identify opportunities to improve profitability.


Useful for businesses..

✅ ..determine the point at which their total revenues equal their total costs, resulting in zero profit or loss, which is so-called the break-even level.


Break-even analysis involves..

✅ ..identifying and calculating two types of costs: fixed costs and variable costs; where

🚩 ..Fixed costs are basically the expenses that remain constant regardless of the level of production or sales volume, such as rent, salaries, and insurance.

🚩 ..Variable costs, on the other hand, vary with the level of production or sales volume, such as the cost of raw materials and direct labour.


To conduct a break-even analysis..

✅ ..a business needs to calculate its total fixed costs and its variable costs per unit of output.

✅ ..the business can then, with this information, determine its break-even point, which is the level of sales volume (quantity) at which total revenue equals total costs.


Break-even analysis does matter..

✅ ..helps businesses set their pricing strategies by determining the minimum selling price required to cover their costs and generate profit.

✅ ..helps businesses identify their most profitable products or services by analyzing the contribution margin, which is the difference between the selling price and variable cost per unit.

✅ ..helps businesses plan and forecast their financial performance by providing insights into the impact of changes in costs or sales volume or sales revenue on their financial performance in terms of profitability.


In essence, break-even analysis helps businesses..

✅ ..answer critical questions such as,

🤔 “How many units of a product or service do we need to sell to break even?” and

🤔 “What happens to our profits if we increase or decrease our selling price or as a result of changes in cost structure?”.

✅ ..make more informed decisions about their financial strategies, which can lead to more efficient operations and increased profitability.


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