break-even

Examples of break-even in the following topics:

• Break-Even Analysis

  • Break-even analysis tells a company how much it needs to sell in order to pay for an investment.
  • 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.
  • The break-even quantity at each selling price can be read off the horizontal axis and the break-even price can be read off the vertical axis.
  • Employ a break even analysis in the context of a company's production process

• 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.

• Leverage Models

  • Analysis of operating leverage generally can be divided into two groups–that based on break-even analysis, which has been previously discussed, and that based on the Degree of Operating Leverage (DOL).
  • As sales increase past the break-even point, both operating margin and the DOL increase rapidly from 0%.
  • As sales continue to increase past break-even, the rate of change in operating margin decreases, as does the the rate of change of the DOL.

• 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.

• Importance of Working Capital

  • Start-ups need to pay attention to their WC because it is the amount of money they need to keep the business running until they break-even (start earning a net profit).

• Valuing Nonconstant Growth Dividends

  • This gives you an estimate of the "break-even" growth rate for the stock's current P/E ratio.

• Answers to Chapter 3 Questions

  • When the Japanese economy entered into a two-decade recession in the 1990s, the bank kept lending to its partners, even though it should not have.
  • You need to examine the incentives.Counselors want to maximize their salaries, so they enroll as many students as possible, even students who should not enroll.
  • Company can circumvent trade barriers, has access to resources in China, could ask the Chinese government for tax breaks and subsidies, reduce economic exposure, and diversify its business.

• Monetary Policy Goal

  • If the inflation rate soars, then money's functions of a "store of value" and "medium of exchange" breaks down.
  • When a society does not use all its resources, an economy's GDP grows at a slow rate or even decreases.
  • If the financial markets and institutions break down, then the economy can enter a severe recession, causing high unemployment and slow or negative GDP growth rates.

• Hegemony

  • A hegemony provides the international public goods, even supporting the free riders because the benefits outweigh the costs.
  • If the hegemony fails, then the public goods for international trade disappear, causing world trade to break down.
  • Over time, the hegemony begins declining, and harmonious relationships break down.

• 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.