Importance of Break-even Analysis

Break-even Analysis is essential because of the following reasons:

1. Set the number of units to be sold: With the help of break-even analysis, a manager can set a target for the number of units to be sold in order to cover the costs. Variable costs, fixed costs, and the selling price are generally used in the calculation of the break-even point.

2. Pricing Strategy: Break-even Analysis tells the company about the selling price; i.e., What selling price can be charged per unit in order to cover the expenses. Also, if the selling price of a commodity is increased, then the number of units of that product to be sold to achieve the break-even point will be reduced. Similarly, if the selling price of a commodity is reduced, then the company will have to sell extra to achieve the break-even point.

3. Setting Targets: The target being set under break-even analysis acts as the goal of the sales team so that they can plan on how and when to sell the units in order to reach the target.

4. Monitors and Controls Costs: Break-even Analysis helps in monitoring the costs occurring in the production process and then control them by cutting down the useless expenses.

5. Manages the Margin of Safety: During financial breakdown, a company’s sales tend to fall. Under those circumstances, break-even analysis helps in deciding the least number of sales that the company needs to make profits. Besides, with the help of margin of safety reports, the management of a company can easily execute high business decisions.