A Break-Even Analysis is an important tool for any business. It 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 (e.g., what price will result in maximizing profits).The benefits of conducting a break-even analysis are numerous:1- It can help businesses determine pricing strategies that will ensure profitability;2- It can help managers understand how changes in revenue or expenses will impact net income;3- It can be used as a planning tool to forecast future sales volume and expenses;4- And lastly, it can be used as a performance measurement tool to assess whether or not targets have been met.
