Discuss the various uses for breakeven analysis.

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pohnpei397 | College Teacher | (Level 3) Distinguished Educator

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The major use of breakeven analysis is to help a business better understand the types of costs that it is incurring as it makes various products.

When doing breakeven analysis, a firm must determine exactly what its costs are.  To do this, it will have to break those costs down into fixed costs and variable costs.  This forces the firm to systematically figure out what costs it faces.

This sort of analysis has many other applications that are related to issues of cost.  First, it can tell the firm the price it must set and the quantity of the product it must make to stay in business.  Second, it can be used to help with decisions about what to do when costs of the firm's inputs change or when the amount of product that can be sold changes.  Since the firm knows how much its costs are and how much it has to sell to recoup those costs, it can adjust when those values change.

In general, breakeven analysis allows businesses to have good numbers about their costs and, with those in hand, to be able to make better decisions about what to do in terms of pricing and production.

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