Question

1. Why is it important for managers to understand the concept of breakeven points? Are there any drawbacks to using break-even analysis? If so, explain. If not, explain.

Answer 1

Break even point is when the company's total expenses is equal to the company's total revenue. The total expenses of a company is consisted of variable and fixed cost. It is important for a manger to obtain the break even point. It helps the manager in decision making process. Break even analysis is a business tool used to assess the performance of a company based on cost. For an effective business plan, break even analysis is important. It determines how the business ideas can be used practically and it also determine whether those plans can be pursued or not. In order to obtain profit or to cover the expenses, the break even analysis help the manager to decide how many units need to be sold. Along with controlling the cost, the break even analysis is useful in promotional process and in pricing. It helps the manager to set realistic targets. If there is any recession or down turn, the analysis helps to the determine the minimum sales required to obtain profit.

Along with advantages there are some drawbacks in break even analysis and it is listed below:

1. While considering a product, it assumes the sales price as constant in every level of output.

2. It assumes both sales and production as similar.

3. It is a time consuming process to prepare break even chart.

4. This analysis can be used only for one product or single mix product.

5. In this analysis the factory size, techniques and process remains constant.