|Question:||What is a breakeven analysis and does it have any limitations?|
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|Breakeven analysis is simply a technique for determining whether what you sell will make any money or not. It is often requested in business plans. Its form is quite simple. If you assume that you can price your product at P, the fixed costs are FC, and the variable costs to produce the product is VC, then you can calculate the quantity of the product you need to sell just to breakeven (that means you just cover your costs and don't make anymore money) as:|
Breakeven number of units = FC/(P-VC)
So, if the price of the product is $5, the variable costs to produce it is $3 and the fixed costs are $1000, then the breakeven number of units is = 1000/(5-3)=500 units.
While breakeven analysis is a useful marketing analytical tool, it does have limitiations. These are typically due to the lack of precision in the numbers (e.g., what is the actual price, is it purchase price or life cycle price) and getting the precise figures for fixed and variable costs. Beyond that, it is limited by its total focus on the quantitative elements of a business plan and doesn't consider competitive reactions, customer needs, etc.