AOF Managerial Accounting Unit 3 Lesson 7 BreakEven

AOF Managerial Accounting Unit 3, Lesson 7 Break-Even Analysis Copyright © 2009– 2016 NAF. All rights reserved.

A break-even analysis consists of two parts 1. It begins with calculating the break-even point of a product or service. 2. Then managers do a break-even analysis to strategize about prices and costs. Why is it important for companies to know how many units or sales they need to become profitable?

The break-even point shows when a product or service has paid for itself Net Sales – Fixed Costs – Variable Costs = Break-Even Point Why should a firm determine its break-even point when it enters into business?

Once the break-even point is calculated, firms conduct the break-even analysis The break-even analysis looks at these variables: • Fixed Production Costs • Variable Production Costs • Unit Sales Price • Expected Unit Sales How would an increase in variable costs affect the breakeven point?

Managers make decisions and address problems based on the break-even analysis • Set sales prices • Target optimal fixed and variable cost combinations • Determine different strategic options o Change costs, price, or volume o Introduce new products o Entice buyers with loss leaders Why might supermarkets be willing to lose money on milk and eggs?