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Break-even analysis entails the calculation and examination of the margin of safety for an entity based on the revenues collected and associated costs. Analyzing different price levels relating to various levels of demand, an entity uses break-even analysis to determine what level of sales are needed to cover total fixed costs. A demand-side analysis would give a seller greater insight regarding selling capabilities.
Itis useful because;
-It`s an important tool of financial management and control
-Can make a good decision
-Can make significant planning of financial structure
Would love to gain knowledge from experts on it.
First, Break even analysis show, on the basis of cost structure, that how much sales must be made to cover all the costs. It can be considered the lowest point of sales revenue, if not met bear the loss.
Secondly, it shows the impact on profitability with the same ratio as its contribution margin appears. One can observe the profitability progression and forecasts.
Third, the analysis highlights the behavior of cost structure on the profitability. Attention can be given to make it at optimum level after considering qualitative as well as quantitative factors. The cost structure can make the company or can break the company, it matters.
