Break Even Analysis (BEA)
Break Even Analysis is a term given to the study of the inter-relationship between cost, volume and profits at various levels of activities. It is the most widely known form of the cost-volume-profit analysis. It is one of the most important techniques of profit planning and control.
Advantages of Break Even Analysis:
It is a simple device to understand the accounting data.
It provides basic info for further profit improvement studies.
It is a useful method for considering the risk implications of alternative actions.
It is a useful diagnostic tool.
Disadvantages of Break Even Analysis:
It is difficult to separate the cost into the fixed and variable cost.
It is not correct to assume that total fixed cost would remain unchanged over the entire range of volume.
The assumptions of constant selling price and unit variable cost are not valid.
BEA is difficult to use in the multi-product form.
It is a short term concept and has a limited use in long range planning.