Search FinanceProfessor.com
| Learn about what is going on in the Financial World.
Sign up for FinanceProfessor's free newsletter! |
Don't understand something? Try Investopedia's Online
Glossary! It is REALLY good!!!
Find
finance books at Amazon.com
| All work and no play makes for sickly people! Get out and workout. Learn more about Running and fitness and see the other side of FinanceProfessor! |
Break even analysis is an investigation to determine the the amount of sales (often measured in Units) that must be sold to break even.
We can complicate it if we want and change the break even definition (such as we have to break even including the cost of equity) but in the simplest form it is just the sales needed to show an accounting profit.
It is often used to look at the degree of operating leverage a firm has. The higher the break-even, the more volatile the firm (holding other things equal).
it is calculated by:
break even point = F/CM
or in English:
Fixed costs divided by contribution margin
Where contribution margin equals selling price - variable costs
Copyright FinanceProfessor.com 2000.
Permission granted for in class use.