Break-Even Analysis confirms from your costs and sales at what point your busine

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Break-Even Analysis confirms from your costs and sales at what point your busine

Break-Even Analysis confirms from your costs and sales at what point your business would “break-even” (total cost equals sales).  This is a very important mathematical equation that will determine early on in your business if you are making enough income or creating enough sales to cover your costs.  Not knowing this can create a sense of false security that can be devastating to a start-up company.
Break-even Analysis Example
Imagine that you want to launch a new business selling a smartphone app. You make the following assumptions about your costs and revenue.
Expected average selling price = $7.
Estimated fixed costs = $75,000 (this is enough to cover your salary and pay for a small office). These costs will not change with the number of apps sold.
Variable costs = $0.50 (these are the transaction fees you need to pay on each sale).
(1) Armed with this information, calculate the break-even point in units:
(2) To earn a profit of 5%, how many units do you need to sell?
(3) What if you were able to reduce the estimated fixed cost to $65,000, what would your new break-even be in units?
(4) What if you missed the mark on variable costs and the actual variable costs are $1.15, what would your break-even be in units?

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