A business breaks even when its cost of production are equal to its sales revenue. This means the business does make profit nor loss.
To work this out:
Break even= Total fixed costs/ Selling price-Variable cost
A margin of safety is: The amount by which a business' actual output is greater than its break even output
To work this out:
Margin of safety= Actual sales - Break even sales.
Limitations of Break even analysis
- Forecast figures may turn out different
- Figures usually relate to one product
- Only applies if all products are sold.
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