Breakeven Analysis

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Breakeven Analysis

Advantages

  • Tables and diagrams that show break-even analysis are easy to view, comprehend and interpret. This makes it a valuable tool, as it does not take a long time to calculate or use.
  • Break-even analysis is a beneficial management tool to aid the decision making process.
  • It can be used to show the level of profit at a given level of output, and to set targets for achieving profits.
  • The margin of safety can be established.
  • A business can use break-even to consider the consequences of changes for a particular product.

Disadvantages

  • The overall problem with break-even as a decision making process tool is that it is based on using predicted figures. There is no certainty that costs and prices will be accurate or constant.
  • The direct or variable costs may change, depending upon the quantities involved. A new diagram/table may have to be have drawn, which is time-consuming.
  • As the level of production increases, the opportunities to gain the benefits of economies of scale with affect unit costs.
  • If there is more than one product involved, it may be difficult to allocate the fixed costs. Calculating the break-even may be difficult.
  • Calculating the total revenue relies on just one price. In business, this is unlikely as discounts or promotional offers may be used.

Evaluation

Overall it is clear that breakeven analysis is limited to its uses because although it helps the decision-making process, it is based upon predicted figures. Therefore the extent to which breakeven analysis is useful depends upon the accuracy of the figures used.

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