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Breakeven Analysis Applications and Uses Use break even analysis for determining profitability Finding break even

point of a product or service is an essential tool in choosing the best price per unit of a product and also helping to determine projected sales. Break even analysis can used for a number of different applications. Its basic function is to determine when a product or service will be profitable. This analysis can be applied to many other applications to determine a future forecast in sales, set a unit price and to target the best strategic options for the company. Once the break-even figures are determined, the company can then use this information for other financial projections. The most common break even analysis applications and uses are: 1. 2. Determining Finding the break the even point point for of unit profitability; pricing;

3. Using the analysis information to choose the best company strategy. Use break even analysis to determine the profitability of a product or service Many things should be considered when finding the break even point for a product's profitability. A company's goal is to be profitable as quickly as possible, so it is more effective for a company to run the numbers through a set of break even points to determine where the company will have the optimal chance of making a profit. Try: Harvard Business School provides a break even analysis toolkit that includes information and analysis tools to determine the break even point of any product or service. Business Tools provides a guide and calculator to perform basic break even analysis. Use the analysis of break even point to set unit prices Performing break even analysis can also lead to the numbers that will help determine a set price per unit. This is calculated by leaving the cost per unit as the variable in a break even analysis equation. The most effective unit price will bring quick profitability to the company without the company spending too much for production and marketing of the product. Try: Bradley University provides information on all of the equations to determine break even analysis, including determining the break even cost, break even number of units and for setting the unit price. Bean Counter explains the relationships between cost, volume and profits in break even analysis. Use the breaking even analysis to determine the best strategic options Another use for break even analysis is to use the information from the analysis to help determine the company's financial strategy. If a company's profitability is determined by the success of one or more products, using the break even point for each product will provide a timeline for the company. This can be used to choose a better overall financial strategy that fits the projected costs and profits. Try: The Weatherhead School of Management provides information on break even analysis and how to use this analysis to help make strategic decisions. All Business provides a guide to use break even analysis for making business decisions and choosing the best strategies. Relationship of MC and MR Marginal cost and marginal revenue are economic measurements used to determine the effects of producing one more unit in a production system. Companies typically look to reach a production equilibrium where marginal cost and marginal revenue are equal. At this point, the company will maximize its profit. The relationship between these two economic concepts is important, as an imbalance on either side can result in production inefficiencies. When an imbalance occurs, companies will experience an economy of scale. Marginal cost increases when total cost changes by producing one additional unit. For example, 50 units cost $100 US Dollars (USD) to produce. A cost increase to $110 USD from producing 101 units indicates a marginal cost of $10 USD for the 101st unit. Each additional unit produced will go through this measurement in order to determine the marginal cost

of additional products. Companies can compare the marginal cost and marginal revenue increase as part of a cost-benefit analysis. The marginal revenue formula is a bit different than the marginal cost calculation. For example, a company can sell 10 units for $15 USD. Selling 11 units will reduce the selling price to $14 USD. The marginal revenue is $150 USD (10 x $15 USD), less $154 USD (11 x $14 USD). Marginal revenue for this product is, therefore, $4 USD. Determining GDP GDP can be determined in three ways, all of which should, in principle, give the same result. They are the product (or output) approach, the income approach, and the expenditure approach. The most direct of the three is the product approach, which sums the outputs of every class of enterprise to arrive at the total. The expenditure approach works on the principle that all of the product must be bought by somebody, therefore the value of the total product must be equal to people's total expenditures in buying things. The income approach works on the principle that the incomes of the productive factors ("producers," colloquially) must be equal to the value of their product, and determines GDP by finding the sum of all producers' incomes.[6] Example: the expenditure method: GDP = private consumption + gross investment + government spending + (exports imports), or

Note: "Gross" means that GDP measures production regardless of the various uses to which that production can be put. Production can be used for immediate consumption, for investment in new fixed assets or inventories, or for replacing depreciated fixed assets. "Domestic" means that GDP measures production that takes place within the country's borders. In the expenditure-method equation given above, the exports-minus-imports term is necessary in order to null out expenditures on things not produced in the country (imports) and add in things produced but not sold in the country (exports). Economists (since Keynes) have preferred to split the general consumption term into two parts; private consumption, and public sector (or government) spending.[citation needed] Two advantages of dividing total consumption this way in theoretical macroeconomics are: Private consumption is a central concern of welfare economics. The private investment and trade portions of the economy are ultimately directed (in mainstream economic models) to increases in long-term private consumption. If separated from endogenous private consumption, government consumption can be treated as exogenous, [citation needed] so that different government spending levels can be considered within a meaningful macroeconomic framework.

What is nominal GNP and real GNP? The nominal GNP is the value of all the production valued at this year's prices. Real GNP is valued at prices of a base year. Thus, if an economy produces in year 1 2 oranges and 3 apples, at prices 5 and 6 respectively and in year 2, 4 oranges and 6 apples, at prices 9 and 8, then:

nominal GDP year 1=2*5+3*6=28 nominal GDP

year

2=

4*9+6*8=84

Notice that you can not compare production between two years because prices increased. It is not correct to state that production multiply by 3. So you should compute real GNP at prices of year 1

Real GDP year 1 (at prices Real GDP year 2 (at prices of year 1) = 4*5+6*6=56 Measuring GDP

of

year

1)

28

(same

as

before)

Gross domestic product, GDP, is defined as the total value of all goods and services produced within that territory during a given year. GDP is designed to measure the market value of production that flows through the economy. Includes only goods and services purchased by their final users, so GDP measures final production. Counts only the goods and services produced within the country's borders during the year, whether by citizens or foreigners. Excludes financial transactions and transfer payments since they do not represent current production. Measures both output and income, which are equal.

Distinguish between GDP and Gross National product GNP GDP differs from Gross National Product (GNP), in excluding inter-country income transfers, in effect attributing to a territory the product generated within it rather than the incomes received in it. Essentially, GDP = GNP + NFP (net factor payments). Real GDP and Nominal GDP Nominal GDP measures the value of output during a given year using the prices prevailing during that year. Over time, the general level of prices tends to rise due to inflation (but may also fall, due to deflation), leading to an increase (or decrease) in nominal GDP even if the volume of goods and services produced is unchanged. Real GDP measures the value of output in two or more different years by valuing the goods and services adjusted for inflation. For example, if both the "nominal GDP" and price level doubled between 1995 and 2005, the "real GDP " would remain the same. For year over year GDP growth, "real GDP" is usually used as it gives a more accurate view of the economy. Relation between Real GDP and Nominal GDP Real GDP is calculated using constant prices whereas nominal GDP uses current prices.[1] The difference between the nominal GDP and real GDP is due to the inflation rate in market. A simple example: Our simplistic economy only produces apples and pears. The price for an apple is $2 in 2000, whereas the price for a pear is $3. Same year we produce 100 apples and 50 pears. In 2005, because of the inflation the price for an apple goes up to $3, whereas the price for a pear is $4 at the same production levels. The nominal GDP in 2000 is ($200 + $150)= $350 and the nominal GDP in 2005 is ($300 + $200) = $500. However real GDP did not change, because real GDP only changes with the changing production level and therefore is a better size measure for economy. Three Approaches to Measuring GDP 1. Expenditures Approach: The total spending on all final goods and services (Consumption goods and services (C) + Gross Investments (I) + Government Purchases (G) + (Exports (X) - Imports (M)) GDP = C + I + G + (X-M) 2. Income approach (NY = National Income)

Using the Income Approach GDP is calculated by adding up the factor incomes to the factors of production in the society. These include National Income (NY) + Indirect Business Taxes (IBT) + Capital Consumption Allowance and Depreciation (CCA) + Net Factor Payments to the rest of the world (NFP) In this approach, NY = Employee compensation + Corporate profits + Proprietor's Income + Rental income + Net Interest CCA = Igross + Inet (I= Investment) NFP = Payments of factor income to the ROW minus the receipt of factor income from the rest of the world. Thus, GDP - NFP = GNP GROSS NATIONAL PRODUCT) GNP - CCA = NNP ( NET NATIONAL PRODUCT) NNP - IBT = NY (NATIONAL INCOME) 3. Value added Approach: The value of sales of goods - purchase of intermediate goods to produce the goods sold. What is the difference between nominal and real GNP Real GNP is 1 that has been adjusted for the effects of inflation. ... ...MORE... Read More Source: http://www.chacha.com/question/what-is-the-difference-between-nom... What is nominal GNP and real GNP? The nominal GNP is the value of all the production valued at this year's prices. Real GNP is valued at prices of a base year. Thus, if an economy produces in year 1 2 oranges and 3 apples, at prices 5 and 6 respectively and in year 2, 4 ora... Read More Source: http://wiki.answers.com/Q/What_is_nominal_GNP_and_real_GNP What is the difference between GDP (PPP), Real GDP, GNP, and GDP ... GDP (PPP) removes exchange rate fluctuations real GDP removes inflationary pressures. GNP is GDP plus what nationals earn abroad minus what foreigners earn in the domestic economy. GDP nominal is the market value of all final goods and serv...