5 important Uses of Break-Even Concept



5 Important uses of Break-Even Concept are as follows:

Break-even analysis can be used, for

(1) Predicting the costs and revenue at alternative outputs and sales volumes;

(2) Predicting the profits at alternative sales volumes;

(3) Measuring the effect of price changes on the total profits;

(4) Measuring the extra sales required to justify an increase in specific expenses such as advertising or by augmenting the sales force; and

(5) Measuring the effect of changes in the unit variable cost such as an increase in the unit cost of labour which is important with the ever increasing demand for more wages.

The break-even concept is thus very useful in planning and controlling but must be used with an awareness of the assumptions underlying its application. There is for instance an implied assumption of linear relationship, i.e., the cost moves in a straight line as volume changes which is true in only certain circumstances.

Again the diagram assumes that the organisation is selling only one product, where there are several products sold with different marginal incomes, the profit graph can be drawn for the whole company on the basis of the average marginal income for all the products.

The profit graph is thus affected by changes in the product mix. In fact it could be more useful to draw separate graphs for homogenous product lines or groups of products rather than merely for the organisation as a whole.