In any business the manager of a business has to make irrespective of what they produce they have to ensure that the products they produce maximize owners equity. That is the prdoucts and services they offer can make a profit and to identify loss making products and introduce new products if they have a profitable market. In addition, they must have a cost control system, which can minimize overheads and direct cost of producing goods and services.
Break-Even analysis is one of the simplest method for a business to make the above mentioned decisions, where the enterprise or business entity produces very limited number of products. As well, the cost can be analysed in to fixed and variable cost accuratlely. That is, it has a consting system, which can identify variable and fixed cost. Fixed cost are costs, where the cost over a period is constant irrespective of the volume of production to a level. Variable costs are costs that varies with the level of business activity or level of production. Manly, for most businesses material costs and production labor costs are variable costs and some overheads like fuel costs are to some extent variable. However, most overhead costs for most businesses are fixed over a volume of production and there fore fixed costs. However, some costs have an element of variable and fixed cost elements called semi-fixed or semi-variable costs. These cosst have to be separeted using statistical regresion analysis. That is the costing sytem has to produce for each product what is the unit variable cost, selling price of each unit, fixed cost for a period. maximum sales possible, which is estimated for a future period. Then one can determine the production point where the profit is zero. For some products the break-even point will be at higher level and for some products the break even point will be at a lower level of production. As well, the margin of safety that the excess profit that can be earned after the break even point also varies. There fore, to maximise profit earned from each product is to reduce variable cost and reduce overhead and increase sales by cost effective promotions and advertising and improving the quality of the products comapred to its competitors. There fore break-even analysis gives a tool for a manger to analyse the mix of products that maximize profit for a period and have cost control systems so that it can minimize waste and improve productivity of labor force and stremling production methods and operations.
In effect break even analysis enable business managers to make effcvive decsions based on sound rational basis and based on cost information and other limiting factors. As well, it gives the manager how a manger can improve profitability of the business as a whole in a dynamic and uncertain market place my monitoring cost and improving the efficiecy of the organization on a continuous basis.