Distinguish between breakeven point and shutdown point of a firm?
The break-even point is the point at which total cost and total revenue are equal, meaning there is no loss or gain for your small business. In other words, you’ve reached the level of production at which the costs of production equals the revenues for a product.
Breakeven point occurs when marginal cost (MC)= average cost (AC)
A shutdown point is a level of operations at which a company experiences no benefit for continuing operations and therefore decides to shut down temporarily—or in some cases permanently. It results from the combination of output and price where the company earns just enough revenue to cover its total variable costs.
The shutdown point denotes the exact moment when a company’s (marginal) revenue is equal to its variable (marginal) costs—in other words, it occurs when the marginal profit becomes negative.
It is a point where marginal cost (MC) = average variable costs
Benefits of a Breakeven Analysis
A breakeven analysis can help with many things, including:
- Finding missing expenses. A breakeven analysis can help uncover expenses that you otherwise might not have seen coming. Your financial commitments will be determined at the end of a breakeven analysis, so there won’t be any surprises down the line.
- Limiting decisions based on emotions. Making business decisions based on emotions is rarely a good idea, but it can be hard to avoid. A breakeven analysis leaves you with hard facts, which is a better viewpoint to make business decisions from.
- Setting goals. You will know exactly what kind of goals need to be met to make a profit after a breakeven analysis. This helps you set goals and work toward them.
- Securing funding. Often, you will need to use a breakeven analysis to secure funding and show investors the plan for your business.
- Pricing appropriately. A breakeven analysis will show you how to properly price your products from a business standpoint.
CATEGORIES Economics
TAGS Dr. Bbosa Science
