Break-even analysis is a necessary and familiar tool to most executives. It provides a logical analytical tool for determining the relationship between fixed costs, variable costs, and revenues. These relationships can be graphed in order to illustrate the point at which costs are at least covered by revenue.
The break-even analysis, however has many other applications. For example, an analysis can be used to test different marketing strategies or to develop particular contingency plans. It can also be used to solve various and many "what ifs'" such as: What would happen to sales volume if and profits if fixed costs increase and prices remain consistant? What steps can be taken in the event that your competition cuts prices and sales volume decreases? What increase in sales volume must be attained to justify an increase in your advertising budget? To justify a 30 day extension to a distributor, how much additional sales volume is needed?
Break-even can also be used to determine the effect of a major acquisition on a fixed, variable and total costs; determine the maximum variable costs; measure past performance; ensure a minimum profit; or identify the point at which a company, department or product should be shutdown.
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