what is importance of break even point in decision making?
Answers
➽ Break-Even Analysis
A break-even analysis is an economic tool which is used to determine the cost structure of a company or the number of units needs to be sold to cover the cost. Break-even is a circumstance where a company neither makes a profit nor loss, but recovers all the money spent.
Break-even analysis is used to examine the relation between the fixed cost, variable cost, and revenue. Usually, an organization with low fixed cost will have a low break-even point of sale
➽ Importance of Break-Even
Analysis:
➯ Manages the Size of Units to be Sold
With the help of break-even analysis, the company or the owner comes to know how much units need to be sold to cover the cost. The variable cost and the selling price of an individual product and the total cost are required to evaluate the break-even analysis.
➯ Budgeting and Setting Targets
Since a company or the owner know at which point a company can break-even, it makes it easy for them to fix a goal and set a budget for the firm accordingly. This analysis can also be practised in establishing a realistic target for a company.
➯ Manage the Margin of Safety
In financial breakdown, the sales of a company tends to decrease. The break-even analysis helps the company to decide the least number of sales required to make profits. With the margin of safety report, the management can execute a high business decision.
➯ Monitors and Controls Cost
Companies profit margin can be affected by the fixed and variable cost; therefore, with break-even analysis, the management can detect if any effects are changing the cost.
➯ Helps Design Pricing Strategy
Break-even point can be affected if there is any change in the pricing of a product. For example, if the selling price is raised, the quantity of the product to be sold to break -even will be reduced. Similarly, if the selling price is reduced, a company needs to sell extra to break-even.