5.5 Aspects of break-even analysis

5.5 Break Even Analysis involves:

1. break even quantity point
2. profit or loss
3. margin of safety
4. target profit output
5. target profit
6. target price

break-even analysis gives managers+entrepreneurs info and forecasts about firm’s cost, revenues and profits

• easily interpreted
• reduce high risk decisions BEP break even point = when TR (total revenue) intersects TC (total costs) BER Margin of safety positive margin of safety: earn more than BEQ

Target Profit Output

target profit quantity = (fixed cost + target cost) / (price - average variable cost) Target profit: value of profit that they aim to achieve Target price: average fixed cost + average variable cost or target price = (total fixed cost / output) + average variable cost target price beyond break even target price = (target profit + total cost) / quantity of output Target profit = (Price $\times$ quantity) - [ fixed cost + (average variable cost $\times$ quantity)] or target profit = Total revenue - Total cost