Question

Q2. (a) WHAT IS BREAK - EVEN POINT? (b) EXPLAIN THE IMPORTANT MANAGERIAL USES OF BREAK-EVEN ANALYSIS.

Answer 1

(a) The Break Even Point is the production level where total revenues equals total expenses. In other words, the break-even point is where a company produces the same amount of revenues as expenses either during a manufacturing process or an accounting period.

(b) THE IMPORTANT MANAGERIAL USES OF BREAK-EVEN ANALYSIS:-

(i) It helps in the determination of selling price which will give the desired profits.

(ii) It helps in the fixation of sales volume to cover a given return on capital employed.

(iii) It helps in forecasting costs and profit as a result of change in volume.

(iv) It gives suggestions for shift in sales mix.

(v) It helps in making inter-firm comparison of profitability.

(vi) It helps in determination of costs and revenue at various levels of output.

(vii) It is an aid in management decision-making (e.g., make or buy, introducing a product etc.), forecasting, long-term planning and maintaining profitability.

(viii) It reveals business strength and profit earning capacity of a concern without much difficulty and effort.