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Break-Even Analysis

Break-Even Analysis

Break-even analysis is a mathematical tool used in business and marketing. If we know the cost of developing a new product, and the cost of making just one of these products, and we also have settled on a selling price for one item, we need to know how many items must we sell to offset the cost of development and production?

Textbooks refer to the cost of development as Fixed Costs and the cost of production, marketing, and distribution as Variable Costs. The selling price of one item is called the Price per Unit, or just Price. A single item is a Unit. Profit is always the bottom line, and formula for getting to the bottom line is:

Profit = Units * (Price - Variable Costs) - Fixed Costs

The break even point is reached when Profit is zero. We want to know how many units must we sell to get to that point.

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