Fin 509 Case 2

Introduction

“How can you tell if your business idea will be profitable? The honest answer is, you can't. But this uncertainty shouldn't keep you from researching the financial soundness of your idea. Preparing what's known as a "break-even analysis," or "break-even forecast," as well as several other financial projections, can help you determine whether or not your business will succeed.” (Laurence, Pg.1) Many forecast methods help establish a preliminary look at how a company will prosper. One such analysis is the break even analysis. “Conducting an accurate break-even analysis requires a careful examination and study of costs and prices in your business. You must know what your product or service costs in total to deliver to the final customer, as well as the price you can charge for the product or service. Include and deduct all miscellaneous expenses involved in operating your business. ” (Tracy, Pg.1) In this paper I will describe the formula so many investors use as a way of defining an investment as good or bad. I will also attempt to enact a scenario showing the relevance of the break-even analysis as it relates to the practical world of forecasting. Appendix 1 of this paper will show some mathematical equations relating to the results.

Break Even Analysis

“Estimating breakeven sales for your business venture can help you set goals concerning the sales volume you will need to achieve to be profitable. The time you invest in doing a breakeven analysis can help you make better decisions about how to manage your new venture.”(Ehmke, Pg. 1) Goals from this analysis can also be created as how and what products will help in defining what is best for the company. Determining what is going to be the most profitable for the company or simply determining what products to sell and not to sell will consequentially equate into the very survival of a company. Sometimes business owners will have to work on a pro-forma or estimate as to the projected sales of the...