According to Chen et al. (2014), breakeven analysis is used to determine the number or volume of services or products that must be sold or reimbursed at a specific price to generate revenue or be equal to expenses. It is computed by dividing the total fixed costs of production based on the price per individual unit and deducting the variable production cost (Narasimhan, 2018). Based on my understanding of this definition, I would define breakeven analysis as the accounting process used by businesses to determine the point at which a business, service, or product is profitable and the number of products or services that must be sold to meet production costs. One of the events when breakeven analysis would most likely be used is in business expansion to get an idea of how long the investment will take before it becomes profitable (Ali, 2020). For example, when investing in an electronics sales business, I would use breakeven analysis to determine the number of electronics that have to be sold to generate profit and how long it will take to sell the electronics for a profit. The second event is in making price reduction decisions. I would use break-even analysis to determine the number of electronics I should sell to make up for or offset a price reduction. Therefore, I can lower the price without putting the business at risk of failure by ensuring that I sell the number of units, offsetting or making up the price decrease. I would also use break-even analysis when developing a business plan to request funds for business expansion. I can use sales and profit predictions made using the break-even analysis to convince investors to fund my business by proving that the business is viable.
Ali, R. (2020, October 12). How to calculate your breakeven point. Oracle NetSuite. https://www.netsuite.com/portal/resource/articles/financial-management/break-even-analysis.shtml
Chen, G. G., Weikart, L. A., & Williams, D. W. (2014). Budget tools; Financial methods in the public sector. CQ Press.
Narasimhan, C. (2018). Breakeven analysis. The Palgrave Encyclopedia of Strategic Management, 132-135. https://doi.org/10.1057/978-1-137-00772-8_705
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Define breakeven analysis in your own words.
When would you most likely use breakeven analysis? Why?