Question

After watching the attached video, comment on the difficulty of calculating the breakeven point ("BEP"). What is the purpose of determining the BEP? How does a company use this in its daily activities? What will it gain from knowing its BEP? In atleast 200 words.

YouTube:

1.Title: They Said Breakeven Analysis was Simple – Not

Duration: (5:39)
User: costmatters - Added: 2/20/11

Answer 1

Calculating the breakeven point (BEP) is difficult and not easy as it seems due to the difficulties that are faced when separating fixed costs and variable costs. For example for manufacturers direct materials will be variable costs but in case of contracts (like a take or pay contract) direct material costs are not purely variable and are more fixed. Similarly direct labor costs are not usually variable. In case of labor contracts direct labor costs have a large fixed component to it. The major problem occurs with regards to overheads. The nature of overheads depends on time horizon and the shorter the time horizon the more fixed will be the overheads and the longer the time horizon the more variable the overheads will be.

The purpose of determining BEP is to set targets in terms of units or in terms of revenue. By computing BEP a company or an organization is able to determine the minimum target it has to attain to remain sustainable and remain profitable. In other words the purpose of BEP is to determine that minimum level of production and sales that an organization should have to remain profitable and to remain a viable entity.

A company uses BEP in its daily activities in the following manner - cost calculations, budgeting and setting of targets, and as a motivational tool. As said earlier a company uses BEP in its daily activities to determine the number of units that should be sold so that losses are avoided. BEP analysis is used for the purpose of budgeting and setting profit targets for the employees and departments.

A company gains both in quantitative as well as qualitative terms from BEP analysis. In terms of quantitative gains a company is able to operate and function at an optimum and efficient level. In terms of qualitative terms a company is able to motivate its employees, especially its sales, marketing and promotion staff.

(320 words)