Fundamentals of Financial Management, Third Edition

20.5 USES OF BREAK-EVEN ANALYSIS

The usefulness of the break-even analysis is clear from the introductory section of the present chapter. Nevertheless, it would not be wrong to highlight some other uses of this analysis.

First, the break-even analysis helps in contemplating whether a new product should be added to the existing product line in the light of its estimated revenue and cost, or, whether, certain items should be dropped from the product line. This way, sound product planning can be done with the help of this analysis.

Second, this analysis helps in make-or-buy decisions which manufacturing firms often encounter. For example, an automobile manufacturer is posed with the question as to whether he should buy a spark plug or whether he ...