BREAKEVEN ANALYSIS

INTRODUCTION
Break-even analysis is the effort of
comparing income from sales to the
fixed costs of doing business.

The analysis seeks to identify how much

in sales will be required to cover all
fixed costs so that the business can begin
generating a profit.

This activity also leads to calculating

and examining the margin of safety for
an entity based on the revenues collected
and associated costs.
IMPORTANCE OF BREAKEVEN ANALYSIS
Breakeven analysis holds significant importance in business
decision-making and financial management. Here are several
key reasons why breakeven analysis is crucial for businesses:

● Determining Profitability:
● Setting Sales target
● Financial Planning and Budgeting
● Risk Assessment
● Decision Support
● Cost Control
● Price Setting
● Performance Monitoring
● Investment Evaluation
● Liquity Management
ADVANTAGES AND DISADVENTAGES OF BREAKEVEN ANALYSIS:-
ADVANTAGES DISADVENTAGES

● Simplicity ● Simplistic Assumptions

● Decision Support ● Limited Scope

● Financial Planning ● Not Applicable For All Business

● Risk Assessment ● Doesn’t Consider Enternal Factors

● Cost Control ● Static Analysis

● Setting Price ● Ignores Time Value of Money

● Performance monitoring ● May Encourage Short-Time Thinking

● Goal Setting
 PROCEDURE
Breakeven analysis involves determining the point at which total revenue equals total costs, resulting in
neither profit nor loss. The process typically involves several key steps:

Step 1. – Identify Fixed & Variable Costs

Step 2. – Determine Selling Price

Step 3. – Calculate Contribution Margin

Step 4. – Compute Break Even Point

Step 5. – Analysis of the Result

Step 6. – Sensitivity Analysis

Step 7. – Decision Making

Step 8.- Continuous Monitoring

 FACTORS INFUENCING BREAKEVEN POINT

Several factors can influence breakeven analysis, impacting the determination of the breakeven point and the
overall financial stability of a business. Here are key factors to consider:

● Fixed Costs ● Economic Conditions

● Variable Costs ● Technological Changes

● Selling Price ● Regulatory Changes

● Contribution Margin ● Seasonality

● Sales Volume ● Operational Efficiency

● Market Demand ● Currency Fluctuations

● Compitition ● Capital Investments

 CHALLENGES AND CRITICISMS
Breakeven analysis, while a valuable tool, is not without its challenges and criticisms. It's important to be
aware of these limitations when utilizing breakeven analysis in business decision-making. Here are some
common challenges and criticisms:

● Simplistic Assumptions ● Not Suitable for Complex Businesses

● Static Analysis ● Ignores Differential Revenue and Costs

● No Consideration of Time Value of Money ● Short-Term Focus

● Ignores External Factors ● Not Suitable for Service Industries

● Assumes Linear Revenue and Cost Relationships ● Doesn't Consider Uncertain conditions

● Limited Strategic Insight ● Limited Insights into Profitability

 APPLICATION OF BREAKEVEN ANALYSIS IN BUSINESS DECISION

MAKING
Breakeven analysis has numerous applications in business decision-making, offering valuable insights that guide
strategic planning, pricing strategies, and financial management. Here are some key applications:

● Setting Sales Targets ● Resource Allocation

● Pricing Strategies ● Performance Monitoring

● Product Mix Decisions ● Negotiation Strategies

● Budgeting and Financial Planning ● Profit Sensitivity Analysis

● Risk Assessment ● Marketing Strategies

● Capital Expenditure Decisions ● Loan and Financing Decisions

● Determining Profitability of Projects

 CONCLUSION

In conclusion, breakeven analysis is a fundamental tool that provides businesses with

valuable insights into their financial health, aiding in strategic decision-making and
financial planning.

By identifying the point at which total revenue equals total costs, the breakeven
analysis serves as a crucial reference point for businesses to assess profitability and set
realistic goals.