A business is said to break even when its total sales are equal to its total costs. A break-even point is that volume of sales or production where there is no profit and no loss. At this point, the contribution is just equal to fixed expenses. If production is enhanced beyond this level, profit shall accrue to the management and if it is decreased from this level, the loss shall be suffered by the organization.
The following are advantages of break-even analysis
- It provides detailed and clearly understandable information. The chart visualizes the information very clearly and a glance at the chart gives a vivid picture of the whole affairs. The information is presented in a simple form and, therefore, is clearly understandable even to a layman.
- The profitability of different products can be known with the help of break-even charts, besides the level of no-profit no-loss. The problem of management’s decision regarding the temporary or permanent shutdown of business or continuation at a loss can be solved by break-even analysis.
- The effect of changes in fixed and variable costs at different levels of production or profits can be demonstrated by the graph legibly.
- The break-even chart shows the relative importance of fixed cost in the total cost of a product. If the costs are high, it induces management to take measures to control such costs.
- The economies of scale, capacity utilization, and comparative plant efficiencies can be analyzed through the break-even chart. The operational efficiency of a plant is indicated by the angle of incidence formed at the intersection of the total cost line and sales line.
- Break-even analysis is very helpful for forecasting, long-term planning, growth, and stability.