Break-even Analysis provides information about break-even levels, the level of actual demand, Target Profit and Margin of Safety.
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Break-even Analysis is a useful business management tool for determining the sales level of the product to earn profit for the firm.
It is quite easy to use and calculate the Total Contribution formula to calculate the business’s profit. And then, to figure out how to increase profit.
Contribution Analysis can help a business organization to identify products in its Product Portfolio that are relatively profitable.
Calculating Target Profit is not that difficult. And, it is possible to use the Break-even Chart and the Break-even Analysis to find it out.
Margin of Safety (MOS) measures the amount by which sales can fall before the company makes losses from a product.
To properly construct the Break-even Chart, we need to plot the curves that indicate Sales Revenue and Total Costs (TC). Use the following five rules.
Break-even Quantity shows the level of output that the business must produce and sell at which Sales Revenue equals Total Costs (TC).
Break-even Quantity shows the level of output that the business must produce and sell at which Sales Revenue equals Total Costs (TC).
To find out how many products a business needs to produce and sell to start making a profit, Break-even Analysis is used.