Uses of Break Even Analysis           

Significant managerial decisions can be made from the break even analysis.

1.       Optimum level of output can be estimated from which the firm will start earning profits.

2.       It is used to determine the target capacity for the firm to get the benefit of minimum unit cost of production. Plant expansion and contraction decisions are often based on break even analysis.

3.       Profit or losses can be forecast from estimates of revenue and cost.

4.       Effect of change in volume of sales, price, and cost of production can be analysed. 

5.       Product mix can be determined - to produce or to purchase a product and whether to drop a product line or not.

6.       Effect of high fixed costs and low variable costs on the total costs can be appraised.

7.       Planning of cash requirements can be done from cash break even.

The break even analysis is not free from limitations. In case of multi-product or joint product firms the breakeven analysis can be applied only if product wise estimates of cost and revenue are available which is extremely difficult. It ignores the selling costs and takes into account only the production costs. Despite these limitations, the concept is used in production planning as it is simple, inexpensive, and explains fundamental relationships between revenue, costs, and profits.

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