Explain why break-even analysis is of reduced value to a multi-product firm. Analyse the factors that any business should take into consideration before using break-even analysis as a basis for decision-making.
Answers
Answer:
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Explanation:
What Is a Break-Even Analysis?
Break-even analysis entails the calculation and examination of the margin of safety for an entity based on the revenues collected and associated costs. Analyzing different price levels relating to various levels of demand a business uses break-even analysis to determine what level of sales are necessary to cover the company's total fixed costs. A demand-side analysis would give a seller significant insight regarding selling capabilities.
KEY TAKEAWAYS
Break-even analysis tells you at what level an investment must reach to recover your initial outlay.
It is considered a margin of safety measure.
Break-even analysis is used broadly, from stock and options trading to corporate budgeting for various projects.
How Break-Even Analysis Works
Break-even analysis is useful in the determination of the level of production or a targeted desired sales mix. The study is for management’s use only, as the metric and calculations are not necessary for external sources such as investors, regulators or financial institutions. This type of analysis depends on a calculation of the break-even point (BEP). The break-even point is calculated by dividing the total fixed costs of production by the price of a product per individual unit less the variable costs of production. Fixed costs are those which remain the same regardless of how many units are sold.