Advantages of Break Even

Advantages of Break Even

1.    Simple

Break even is based on the simple mathematical formula. it is very easy to calculate & understand the calculation. Break even does not involve any complex mathematical or financial calculation.

2.    Basic Decision tool

Break even analyses provides one of the key fundamental information i.e. no profit no loss situation. Many businesses especially in case of new investment are interested in this information. Every business take time to provide desired return, therefore management is interested to cover its costs in early stage.

3.    Link between Volume & Profitability

Break even defines the link or association between volume and profitability. You can improve profitability, by increasing the volume of sales. Break even analyses explains very well that fixed cost can be covered only by increasing contribution.

4.    Widely Used in low stock industry

Break even is widely used in industry, where there is low stock, (produced goods are sold). Break even analyses is used as basic decision making tools by the management.

5.    Desired Profitability

Break even formula with slight change i.e. (adding profit amount to fixed cost) can also be used to determine the desired profitability volume level.

6.    Setting Price

Break even analyses explains that setting of price is very importance, because it has direct link with contribution and profitability.

7.    Variable Cost Role

Break even analyses also explains the role of variable cost in the profitability, it explains that contribution can also be increase by lowering the variable cost. It also explains that variable cost is more relevant for decision making than fixed cost.