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Break-even Analysis

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Break-even analysis is a managerial tool used in business to estimate a fair, competitive and profitable price for products and services. Break-even analysis categorizes costs as variable (changing with volume of production) and fixed (unrelated to volume). In break-even analysis, first, break-even point - where total revenue equals total cost - is calculated. Break-even analysis finds this by dividing total fixed costs by per unit contribution to fixed costs (unit price - unit variable cost). Dollar value is calculated by multiplying break-even point by price per unit. Any per unit contribution to fixed costs beyond break-even point goes to profit. Thus break-even analysis measures the volume of activity required by businesses to remain profitable after covering all fixed expenses. Mangers use break-even analysis to assess multiple price levels, and variable-fixed price combinations. Break-even analysis also helps in determining optimal costs, prices and product-mix. In macroeconomics, break-even analysis yields the point where income exceeds consumption resulting in savings.

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