Break-even output = Fixed costs / (selling price per unit - variable cost per unit)
- estimate the future level of output they will need to produce and sell in order to meet given objectives in terms of profit.
- assess the impact of planned price changes upon profit, and the level of output needed to break even.
- assess how changes in fixed and/or variable costs may affect profits, and the level of output necessary to break even.
- take decisions on whether to produce their own products or components, or whether to purchase from external sources.
- support applications for loans from banks and other financial institutions - the use of the technique may indicate good business sense as well as provide a forecast of profitability.
- The model assumes that costs increase constantly and that firms do not benefit from bulk buying. If, for example a firm negotiates lower prices for purchasing larger quantities of raw materials then its total costs line will no longer be straight. It will in fact level out at higher outputs.
- Similarly, break-even analysis assumes the firm sells all its output at a single price when in reality, firms frequently offer discounts for bulk/wholesale purchases.
- A big flaw in the technique is that it assumes that all output is sold. This may well not be true and, if so, would result in an accurate break-even estimate. In times of low demand, a firm may have difficulty in selling all that it produces.
- Break-even analysis is only as good as the data on which it is based: poor-quality data can result in inaccurate conclusions being drawn.