Introduction
In this assignment, I will evaluate the reliability of break-even analysis in estimating budgeted activity levels for a selected organisation.
Break – Even Analysis
Break even analysis is reliable as it is made from the budget and it gives a financial structure to the business. The data used for break-even, the business try to make the data as accurate as possible. They make this data depending on the previous year’s financial report. That’s why break-even is reliable to estimate current year’s results. In a short run, break-even analysis can be accurate.
There are some limitations of break-even as well. For example, it cannot give accurate results if the data used for it is predicted. Data such as change in direct cost or indirect cost can have an impact on break-even analysis. This means that the results are going to be very different from the actual result. So, in the long run break even will not be reliable. Furthermore, if the company is selling more than one product, it will become really hard for the company to carry out break-even analysis. This is because; all the different products are going to have different prices meaning that the company will have to create different financial accounts for each product they sell. The break-even analysis has to be different for each one as well.
Also, a change in the selling price is going to have huge effect on break-even analysis. If the selling price changes, the whole financial data will change as well. If the total revenue changes the total profit will change as well. This means that if the company relies on break-even analysis, at the end of the year they will see a huge difference in their profit of the business. Break-even analysis shows a straight line for estimated income or cost. If the cost or revenue changes for only one or two months and comes back to normal again, the break-even analysis