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What are some advantages and disadvantages of break even analysis?

A:

Quick Answer

Break-even analysis allow managers to better determine what their goals should be, but it can cause them to not consider other factors. It is a core component of making business decisions. However, it must be used cautiously.

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What are some advantages and disadvantages of break even analysis?
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Full Answer

Break-even analysis is crucial for people considering launching new products. Used correctly, it can help companies determine which products to develop and which to table. Performing a break-even analysis forces people to calculate their costs as accurately as possible, which can lead to helpful insights.

However, break-even analysis only measures a few factors involved in the sale of a product, and these numbers need to be estimated. In some cases, people might underestimate fixed costs or fail to account for factors that can affect the variable cost. Critically, break-even analysis requires companies to determine which price will work best, which is inherently difficult.

A break-even analysis can also stop companies from taking chances. Losses are a part of business, and companies might fail to realize certain benefits that putting a particular product on the market can generate. For example, a product that is likely to generate word-of-mouth buzz might sell better than analyses suggest, and products that get a brand's name and logo out might be worth absorbing some small losses.

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