Chapter 5, Problem 1DQ

Discuss the various uses for break-even analysis. (LO5-2)

Summary Introduction

To explain: The varied usage of break-even analysis.

Introduction:

Break-even analysis (BEP):

This analysis helps a firm to determine no profit and no loss situation. It also helps to determine the relationship between cost, profit and volume.

Answer to Problem 1DQ

The main uses of break-even analysis are as follows:

1. It determines the selling price.

2. It covers return on capital employed.

3. It determines cost and profit.

4. It provides suggestions.

5. It helps in comparing profits among firms.

Explanation of Solution

The major usage of break-even analysis is mentioned below:

1) Determines selling price: It helps in finding out the selling price which will provide the desired amount of profits.

2) Covers return on Capital Employed: It also aids in covering the return on capital employed by fixing the volume of sales.

3) Determines Cost and profit: It helps in finding out the cost and profit in case the volume changes. Not only that, it also aids in determining both revenues and costs and different levels of outputs. Moreover, it helps in disclosing both the business’ strength and the firm's profit-earning capacity in an easy way.

4) Provides suggestions: In case the sales mix shifts from one place to another this break-even analysis helps in providing suggestions for the same and also helps in comparing the profits of different firms. Not only that BEP helps in providing correct decisions through the activities of forecasting and long term planning activities.