Advantages and Disadvantages of Break-even Analysis
1) It is simple to conduct and understand.
2) It shows profit and loss at different levels of output.
3) It can cope with changing circumstances. e.g. the following
changes in the business environment can be shown in a break
even chart.
Factor
Cause
Internal
Employing
extra Fixed costs rise, so total costs rise
sales staff
and beak-even point rises.
Price increase
Revenue rises more steeply, breakeven point falls.
Automation
Fixed costs rise while direct costs
replaces
direct fall, effect on break-even point
labour
unclear.
External Recession
cuts
demand
Price war forces
price cut
Inflation pushes up
direct costs.
Effect
Break-even point unaffected, though
safety margin is reduced.
Revenue line rises less steeply,
break-even point rises.
Direct and total cost line rise more
steeply, break-even point rises.
But
1. It assumes that all output is sold at the given price (this may
well be untrue) .
2. Although it can cope with changes in circumstances, these
factors change regularly reducing its usefulness as a
forecasting tool.
3. The model assumes that costs increase constantly and do
not benefit from economies of scale. If the firm obtains
purchasing economies of scale then its total cost line will no
longer be straight.
4. Break-even analysis is only as good as the data upon which
it is based. Poor quality data will lead to inaccurate
conclusions being drawn.