EDP Notes

ADVANTAGES

Break even analysis presents the picture of profit at different levels of production. From the
management point of view the following are the important uses;
1) It helps to take investment decision.
2) It serves as a useful tool for cost control.
3) It assists in the formulation of price policies.
4) It can be used to study the comparative plant efficiencies of the industry.
5) It is useful for determining costs and revenue at different levels of activity.
6) It helps to determine the selling price which gives desired profits.
7) It is useful in forecasting sales and profits
LIMITATIONS

1) It assumes that the future projections can be made on the basis of past record but this is not
correct.
2) It has limited application in the long range planning.
3) Break-even analysis completely ignores the capital employed in project.
4) It assumes that fixed costs remain fixed for any level of production. But actually it will
remain fixed only up to a certain level of activity.
5) Break-even analysis is a short run analysis of cost volume relationship. It will change
according to variation in costs of material, labour and the introduction of new methods or
product or new equipment.
6) The profits are a function of not only output but also other factors such as technological
changes, improvements in the art of management etc. These have been ignored in breakeven
analysis.
7) It assumes that variable costs vary in direct proportion to volume of production. But the
variable cost need not necessarily vary in direct proportion of output.