break-even
(noun)
Break-even (or break even) is the point of balance between making either a profit or a loss.
Examples of break-even in the following topics:
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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
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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.
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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.
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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.
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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).
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Valuing Nonconstant Growth Dividends
- This gives you an estimate of the "break-even" growth rate for the stock's current P/E ratio.
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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.
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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.
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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.
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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.