Question

5 benifits of break even analysis for financial managers.

Answer 1

Explanation:

Benefits:

The following are the benefits out of break-even analysis:

1. Make or buy decision:

The C-V-P analysis assists in making a choice between two courses of action to make versus to buy. If the variable cost is less than the price that has to be paid to an outside supplier, it may be better to manufacture than to buy.

2. Production planning;

The C-V-P analysis helps in planning the production of items giving maximum contribution towards profit and fixed costs.

3. Cost control:

As a cost control device, the C-V-P analysis can be used to detect insidious upward creep of costs that might otherwise go down.

4. Financial structure:

Break-even analysis provides an understanding of the behaviour of profits in relation to output. This understanding is significant in planning the financial structure of a company.

5. Conditions of uncertainty:

When some reasonable basis for subjective extrapolation is available, the break­even analysis provides the financial management with information helpful in its decision-making activities.

Answer 2

Answer:

1. Make or buy decision

The C-V-P analysis assists in making a choice between two courses of action to make versus to buy. If the variable cost is less than the price that has to be paid to an outside supplier, it may be better to manufacture than to buy.

2. Production planning

The C-V-P analysis helps in planning the production of items giving maximum contribution towards profit and fixed costs.

3. Cost control

As a cost control device, the C-V-P analysis can be used to detect insidious upward creep of costs that might otherwise go unnoticed.

4. Financial structure

Break-even analysis provides an understanding of the behaviour of profits in relation to output. This understanding is significant in planning the financial structure of a company.

5. Conditions of uncertainty

When some reasonable basis for subjective extrapolation is available, the break­even analysis provides the financial management with information helpful in its decision-making activities.