Question

The breakeven point is an important factor of cost accounting. Miscalculating the breakeven point could be detrimental to an overall forecast. Discuss the pros and cons of the different methods for finding the breakeven point with your peers.

Answer 1

Breakeven point is the point at which there is no profit no loss. It is very important to calculate the breakeven point correctly because it helps in determining the units to be produced so as the organization can make profits. Even one single unit more than the breakeven point contributes much to the profit.

So breakeven point is necessary to calculate properly. It is helpful in estimating the profit. If it is calculated wrongly, then organization's estimate would get disturbed which could result in possible losses. One single unit difference can cause a loss or profit and can make a huge difference. So it is very important to calculate breakeven point correctly.

Breakeven analysis is usually done with following two conditions :

The first is linear cost and revenue relationship and the second one is non linear cost and revenue relationship.

Below are mentioned various methods of doing breakeven analysis which are dependent on above discussed two conditions.

Linear cost include two methods. They are : Graphical method and Algebric method.

Non linear also include two methods namely, Contribution analysis and Profit Volume ratio.

Pros and cons of these methods are as follows :

Advantages -

1) profits and losses can be measured even if the production and sales level are different.

2) It can be used to predict the sales and changes in price of sales.

3) It helps in analyzing the relationship between the fixed costs and the variable costs.

4) The effect of cost can be predicted and also the efficient changes in the profitability can also be predicted.

Disadvantages -

1) It is assumed that sales price are not changing and thus remaining constant at different levels of output.

2) This assumes that production and the sales are the same.

3) The breakeven charts which are prepared takes a lot of time.

4) This generally applies to only a single product or we can say the a single mix of various products.