Accounting - breakeven analysis Essay Example | Topics and Well Written Essays - 1750 words

Accounting - breakeven compendium - Essay ExampleThus this analysis becomes quite useful in calculating the profit, loss and the break-even point at different gross revenue levels and also helps managers and analysts to calculate the minute of units that need to be sold in h wholeow to recover the products production embodys. Break-even analysis is also very useful for clarified melodic linees because it merchantman help the owner or the manager of the business to assess the change in prices of the products being sold or a decrease or extend in the costs which have a direct effect on the breakeven analysis and the profitability of the small business. The break-even analysis is especially useful when deciding order quantities or when making pricing purposes. It allows the firm to be able to set a price which shall help it maximize its margin of safety. Break-even analysis also influences merchandise decisions. The firm can set a desired profit level which it hopes to achiev e within a particular period and so, with the help of the break-even analysis, identify the number of units that need to be sold in order to achieve the desired level of profitability and direct its marketing efforts in order to achieve these sales levels. Break-even analysis can also help the small business owners in making crucial decision like hiring or firing employees or maybe expanding the business to gain greater market helping and help increase the companys profitability. It can also help the owner in deciding in whether to purchase additional machinery or equipment for the business. Since it projects fixed costs and protean costs separately as well as together, business owners can take the help of this analysis when making critical decisions much(prenominal) as those relating to capital expenditure. Break-even analysis manakin is very simple to use as the user of this computer simulation can easily change the inputs to compute the break-even point. For example if an o wner predicts that in the next month the variable cost will increase by 5% so, the owner can easily use this model and see how many more units need to be sold to reach the break-even point for the next month. alike is the case with an increase in Rent, which increases the fixed cost. Hence the owner, keeping price and variable costs constant, can predict the number of units needed to be sold if there is an increase in the fixed cost of the business. Alternatively, the break-even analysis can be used to identify rising costs and help the management in deciding how to cut down on variable or fixed costs. There are but a few flaws to the break-even analysis. Break-even analysis is only useful to a certain extent as it assumes that all outputs produced in a period are sold which may not be the case in real-life situations. The break-even model is also very simplistic in nature and considers all inputs constant which may not be the case in the real world. However, the break-even model h as some assumptions which make it less accurate in determining the break-even quantity. It assumes that the selling price and the variable cost will remain constant. However, for small businesses this rarely happens. So, we then use the average selling price which