Why is Break-even analysis regarded as a useful element of financial plan?

Question

Accepted Answer

Break-even analysis is useful as a component of the financial plan because it helps the entrepreneur in assessing: (i) The minimum level of output to be produced - the entrepreneur knows the volume of production below which the business would make losses. (ii) The effect of change in quantity of output upon the profits - the entrepreneur can estimate how profits respond when the output increases or decreases. (iii) The selling price of the product - the analysis helps decide the price at which the product must be sold in order to break even. (iv) The profitable options in line of production - the entrepreneur can identify which products or product lines are worth producing. (v) The number of units that must be sold or the sales volume that must be achieved in order to break even. (vi) Setting profit goals and sales targets, since break-even analysis helps determine the volume of sales needed to cover total variable and fixed expenses by the new enterprise.