What Are Some Advantages and Disadvantages of Break Even Analysis?

What Are Some Advantages and Disadvantages of Break Even Analysis?

What Are Some Advantages and Disadvantages of Break Even Analysis?

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.

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.