Management Glossary

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breakeven analysis
A process typically used when deciding whether to proceed with a new business or project. The breakeven analysis determines the level of sales required such that the new business/project will exactly break even, i.e. neither make a profit nor a loss. Obviously, if the projected sales are lower than this breakeven point then the project should not be undertaken. However, that is a minimum requirement. Projects/new businesses should be undertaken only if they are projected to deliver a rate of return equal to or greater than the company's hurdle rate of return. Note 1: In the above paragraph, "project" should be read as having a broad definition and would include, for example, simply the purchase of a new piece of equipment. Note 2: The benefit of a new project within an existing business might not be an increase in sales, but rather, for example, a decrease in the cost per unit of production. In this case, a breakeven analysis is still appropriate because it shows the level of sales required such that those lower costs per unit will cover the fixed costs of the project.
Contributed by: ManagerWise Staff
See: hurdle rate of return

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