#3 Break-Even Analysis Rob Holland Assistant Extension Specialist Agricultural Development Center September 1998 One of the most common tools used in evaluating the economic feasibility of a new enterprise or product is the break-even analysis. The break-even point is the point at which revenue is exactly equal to costs. At this point‚ no profit is made and no losses are incurred. The break-even point can be expressed in terms of unit sales or dollar sales. That is‚ the break-even units
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Calculating the break-even point To avoid making a loss every business must at least break-even by achieving a level of sales that covers its total costs. But what level of sales is necessary to break-even? To explore the concept of break-even‚ we need to define some basic terms: Fixed costs: Costs that do not vary with output or sales e.g. managers salaries‚ rent and rates on business premises. Variable costs: Costs that vary with the quantity produced or sold e.g. costs of materials
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GETWELL CLINICS BREAKEVEN ANALYSIS Analyzing Break-Even Points and Dealing with Practice Constraints INSTRUCTIONS: FILL IN THE YELLOW HIGHLIGHTED AREAS • Explain the relevance of Diagnosis Related Groups (DRG) analysis as a tool that drives costs and affects management decisions in health care. Diagnosis Related Groups is a system that categorized patients into specific groups based
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Definition of Break Even point: Break even point is the level of sales at which profit is zero. According to this definition‚ at break even point sales are equal to fixed cost plus variable cost. This concept is further explained by the the following equation: [Break even sales = fixed cost + variable cost] The break even point can be calculated using either the equation method or contribution margin method. These two methods are equivalent. Equation Method: The equation method centers on
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Question: Undeniably‚ breaking even is not the ultimate goal of firms. Why then bother about the break-even analysis? THE IMPORTANT OF BREAK-EVEN ANALYSIS It is an undisputable fact that every business’ objective is to survive and make profit as compensation of being in existence. Frankly‚ predicting a precise amount of sales or profits is nearly impossible. No business aims at making losses whatsoever. Given this‚ a person starting a new business often asks‚ ‘’ At what level of sales will my
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In order for Jane to establish her Break-even for one month‚ she needs to identify and calculate the following Firstly‚ Jane needs to gather all her products with their Cost Price (Variable Cost per item) as well as her Selling Price. By identifying each products’ selling price and cost price‚ Jane can determine the difference – The Profit. This helps establish her fixed costs in which are referred to as the direct costs of production. This ensures how many need to be made and sold to cover
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PRACTICE QUESTIONS ON BREAK-EVEN ANALYSIS 1. A small firm intends to increase the capacity of a bottleneck operation by adding a new machine. Two alternatives‚ A and B‚ have been identified and the associated costs and revenues have been estimated. Annual fixed costs would be $40‚000 for A and $30‚000 for B; variable costs per unit would be $10 for A and $12 for B; and revenue per unit would be $15 for A and $16 for B. a) Determine each alternative’s break-even point in units. b) At what volume of
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prefer to use? b) Break-Even Analysis – Systems of Equations Application Problem Suppose a company produces and sells pizzas as its product. Its revenue is the money generates by selling x number of pizzas. Its cost is the cost of producing x number of pizzas. Revenue Function: R(x) = selling price per pizza(x) Cost Function: C(x) = fixed cost + cost per unit produced(x) The point of intersection on a graph of each function is called the break-even point. We can also find the break-even point using the
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and break up the monopoly of the 747‚ but it didn’t have a product to compete with Boeing’s 747. Compared to the 747‚ the A3XX provides more advantageous features which would attract passengers especially on the longer routes‚ such as more space per seat‚ four-engine plane‚ etc. The combination of increased capacity and reduced costs would provide superior economics. Airbus felt confident that capacity increases would eventually prevail. As we stated above‚ Airbus’s objectives are to break up the
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Recommendation I recommend that proposal 2 should be chosen‚ because it has maximum profit. It also has the best margin of safety and contribution/sales ratio. In proposal 2‚ an additional product W is added to the mix. So the fixed cost is increased. Although the fixed cost is increased‚ the profit increases sharply. What is noteworthy is that breakeven point is the largest in the 3 situations. It means that the company should take longer time to reach the breakeven point. So the company many
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