BREAK-EVEN ANALYSIS

Characteristics of Break-Even Point

The losses cease to occur while profits

have not yet begun.

It suggests the BEP level (profit or loss).

It indicates the minimum level of production/sales.

Basic Assumptions

It assumes that cost can be classified into fixed

and variable costs.

Sale price of the product is constant.

It assumes constant rate of increase in

variable cost.

No improvement in technology and labor

efficiency.

Changes in input prices.

The production and sales are synchronized.

Uses of Break-Even PointHelpful in deciding the minimum quantity of

sales

Helpful in the determination of

tender price

Helpful in examining effects upon

organization’s profitability

Helpful in deciding about the substitution

of new plants

Helpful in sales price and quantity

Helpful in determining marginal

cost

Advantages of Break-Even Analysis

Explains the relationship

between cost, production, volume

and returns.

Shows the effect of profit levels.

Useful when used with partial budgeting.

It helps to prevent losses.

Limitations of Break-Even AnalysisIt is only a supply side (i.e. costs only).

Fixed costs (FC) are constant.

Average variable costs are constant per unit of output.

The quantity of goods produced = quantity of goods sold.

Profit are the function of output alone.