Break-Even Analysis
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FastTrac, Kauffman Foundation
You can use break-even analysis to determine how much product or service you need to sell at a specific price to meet all costs. Break-even analysis is a mathematical formula that discloses how much output must be sold for the business to break even. Break-even is reached when the money coming in equals the money going out.
The break-even point in units is the number of units that need to be sold to cover all costs, both fixed and variable. Fixed costs remain relatively constant no matter how many products or services are produced or sold. These costs typically include rent, insurance, interest charges, and executive salaries. Variable costs fluctuate directly with production and sales levels, such as manufacturing labor, materials used in production, and sales costs.
Example- When starting his manufacturing company, Ralph used break-even analysis to consider prices. The fixed costs of the company were estimated at $50,000 and variable costs at $.20 per unit. With a $1 retail price per unit, the break-even point would be 62,500 units.
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