Conducting a breakeven analysis is highly important to the business owner. Keeping profit transparency in the business across the products and volume requirements is a business fundamental.
Changes in customer preference, trading globally with shifting currencies, and price expectations all contribute to the importance of understanding the required sales volume to achieve the desired profit outcome.
Once you have identified and discussed your ratios with your accountant, you can use a breakeven analysis tool to calculate the units of sales required to cover your costs and determine the price of your products.
In order to determine your breakeven amount, you need to know:
- What your costs are (fixed and variable costs)
- How the costs respond to changes in the volume; and
- The relationship of the change with your profit
Your costs may not be constant - they may vary with changes in your business activity. An example could be that you sell more items and therefore your cost to purchase these items has reduced (because your supplier gives a volume discount).
Knowing how these changes work assists greatly to forecast, budget and introduce new products.
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