What is the primary purpose of a break-even analysis?

The primary purpose of a break-even analysis is to determine the sales volume needed to cover costs. This analysis helps businesses understand the point at which total revenues equal total costs, indicating no profit or loss. By identifying this break-even point, management can make informed decisions regarding pricing, cost control, and sales strategies. This is particularly crucial for establishing targets and planning for financial sustainability, as it highlights the minimum performance required to avoid losses.

Understanding the sales volume necessary to break even also enables businesses to assess how changes in sales prices, fixed costs, and variable costs will impact overall profitability. This insight is fundamental for strategic planning and risk management, as it equips decision-makers with the necessary information to steer their operations toward profitability.