Break-even analysis entails calculating and examining the margin of safety for an entity based on the revenues collected and associated costs. In other words, the analysis shows how many sales it takes to pay for the cost of doing business. Analyzing different price levels relating to various levels of demand, the break-even analysis determines what level of sales are necessary to cover the company’s total fixed costs. A demand-side analysis would give a seller significant insight into selling capabilities.
Key Takeaways:
• Break-even analysis tells you how many units of a product must be sold to cover the fixed and variable costs of production.
• The break-even point is considered a measure of the margin of safety.
• Break-even analysis is used broadly, from stock and options trading to corporate budgeting for various projects.
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