break-even point

Examples of break-even point in the following topics:

• Benefits and Risks of Operating Leverage

  • The use of operating leverage can multiply profits when a given break-even point is reached, but it can intensify losses when it is not.
  • Therefore, once a certain break-even point is reached, the contribution that sales make to profits is much higher than it would be if a greater portion of the costs were variable.
  • Problems can arise if a company has very high fixed costs, and if a company has difficulty selling enough units to break even on a particular investment.
  • Just as the use of operating leverage can lead to greater profits, if a company is able to reach a given, break-even point, so too can the use of leverage drastically multiply losses if that point is not reached.

• Break-Even Analysis

  • The key to understanding the appropriate amount of operating leverage lies in analysis of the break-even point.
  • Break-even analysis tells a company how much it needs to sell in order to pay for an investment-- or at what point expenses and revenue are equal.
  • When sales have exceeded the break-even point, a larger contribution margin will mean greater increases in profits for a company.
  • By inserting different prices into the break-even formula, you will obtain a number of break-even points-- one for each possible price charged.
  • In the above graph, points A, B, and C are the break-even points.

• Defining Financial Leverage

  • Even with a great deal of collateral, borrowing big means risking big.
  • The debt to equity ratio plays a role in the working average cost of capital (WACC) as well, as the overall interest on financing represents the break-even point that must be obtained to achieve profitability in a given venture.

• Factors Controlled by the Firm

  • The IRR is going to look at the net present value (NPV) of a given project, and calculate it for a break even point (i.e. set the equation to 0, when taking cost into account).

• Sales Forecast Input

  • Both of these metrics can be viewed as extensions of break-even analysis.
  • The formula for target volume will be familiar to those who have performed break-even analysis.
  • From another perspective, the break-even volume equation can be viewed as a special case of the general target volume calculation — one in which the profit target is zero, and a company seeks only to cover its fixed costs.
  • In target volume and target revenue calculations, managers go beyond break-even analysis (the point at which a company sells enough to cover its fixed costs) to determine the level of unit sales or revenues needed not only to cover a firm's costs but also to attain its profit targets.

• Impact of Diversification on Risk and Return: Unsystematic Risk

  • If you put all your eggs in one basket, and that basket breaks, you are stuck with nothing to fry up into an omelet.
  • Diversification relies on the lack of a tight positive relationship among the assets' returns, and works even when correlations are near zero or somewhat positive.
  • Diversification comes with a cost associated with it, and some might point out that it is possible to over-diversify.
  • At some point, it just isn't worth it anymore.
  • In fact, two of the biggest mutual fund managers–Fidelity and Vanguard–take opposite stances on this issue and use it as a selling point to customers.

• Discounted Payback

  • The majority of business projects (or even entire business plans for an organization) will require capital.
  • Time is a commodity with cost from a financial point of view.
  • If this is the case, each cash flow would have to be $2,638 to break even within 5 years.

• Leverage Models

  • Not so profitable at this point, as you can see.
  • To find our where you'll break even, simply subtract the variable cost from the sale price and divide that by the fixed costs (i.e. how many $0.90 profits are required to cover the full $100,000 you owe in fixed costs).
  • Around your 111,111 cup of coffee, you'll find yourself just about even.
  • After this point, pretty much every cup of coffee you sell if 90% profit and 10% cost.

• Defining the Financial Statement

  • A balance sheet is often described as a "snapshot of a company's financial condition" at a single point in time.
  • A cash flow statement shows how changes in income affect cash and cash equivalents, breaking the analysis down to operating, investing and financing.
  • The statement breaks down changes in the owners' interest in the organization and in the application of retained profit or surplus from one accounting period to the next.

• Other Topics in M&A

  • From an M&A point of view, a private placement is thus similar to a merger because it usually involves an institution (rather than numerous public investors) acquiring a stake (assets) in a company.
  • A firm's "break-up" value is sometimes believed to be greater than the value of the firm as a whole.