Situations in Which Break Even Analysis Can be a Useful Tool

Any profitable organization’s main aim is usually to earn profit.Consequently, such organizations cannot afford to leave earning profit to chance, rather the management is required to have strategies in place to ensure that that objective is realized. Managers use break even analysis to evaluate the organization’s earning capacity and for planning. Under break even those charged with governance can study the organization’s revenues and costs in relation to the volume of sales. Generally, break even analysis is a technique employed by managers in costing that facilitate profit planning.

Break even analysis solves several managerial problems and can be very advantageous to a business(Garrison, Noreen& Brewer, 2003). Among the advantages of this analysis include:

  1. Controlling a business processe’s expenses including manufacturing, general, organizational, and trade expenses.
  2. Assessing new project’s promotional potential.
  3. Projecting the impact of price changes on profit and on the organization’s break-even point.
  4. Projecting the impact of wage variations on profit and the organization’s break-even point.
  5. Forecasting the effect of plant size and sales channels changes in the size on profit and the organization’s break-even point.
  6. Scrutinizing leverage, both operating and financial.
  7. Comparing projects profitability.

For example:

Agood number of business executives and other stake holders are unable to understand and interpret theaccounting data as presented on the financial statements and financial reports. However, by presenting the same data through break-even charts, the organization’s stakeholders can easily grasp and understandthe information. Executives should however be careful whenever using break-even analysis as its limitations may result in significant inaccuracies.

 


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