Importance of Break-even analysis

Topics: Variable cost, Costs, Fixed cost Pages: 2 (717 words) Published: October 25, 2013


Question: Undeniably, breaking even is not the ultimate goal of firms. Why then bother about the break-even analysis? THE IMPORTANT OF BREAK-EVEN ANALYSIS

It is an undisputable fact that every business’ objective is to survive and make profit as compensation of being in existence. Frankly, predicting a precise amount of sales or profits is nearly impossible. No business aims at making losses whatsoever. Given this, a person starting a new business often asks, ‘’ At what level of sales will my company make a profit?’’ This question clearly predicts the uncertainty of businesses on the level of sales at which profits will be realized. Certainly, break-even analysis is the first resort. Therefore, it becomes absolutely necessary for a business to prioritize break-even analysis when making profit oriented decisions. This leads us to the reasons why businesses should pay attention to break-even analysis. Break-even point can be defined as a point where total costs (expenses) and total sales (revenue) are equal. Specifically, break-even analysis if the use of break-even point to make cost, volume, and profit analysis. Break-even analysis offers businesses lots of benefits that are worth considering. There are a number of benefits that hitherto a business would not enjoy. The break-even analysis gives an insight about the sales level a business needs in order to make profit. It gives the business a forecast on its cost, volume, and profit behavior. Managers can determine the effect of changes in cost and volume of sales on the profit. By so doing, it guides the decision making process of a business. The break-even analysis is also helpful to managers as the provided information such as margin of safety in units and sales (MOS), and degree of leverage (DOL) can be used in making important decisions in business, for example projecting the sales level needed to obtain certain targeted profit. With the help the break-even analysis, businesses can ascertain the...
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