Benefits and Limitations of Break-Even Analysis |Financial ManagementbySmriti ChandFinancial ManagementSome of the major benefits and limitations of break-even analysis in financial management are as follows:Break-even analysis is a very important and useful tool of financial management and control. The simplicity of these charts is one of their great values.As they are easy to understand, they constitute a helpful mechanism for showing the top management the problems inherent in cost-volume- profit relationships. They are extremely useful in planning devices.Benefits:The following are the benefits out of break-even analysis:1. Make or buy decision:The C-V-P analysis assists in making a choice between two courses of action to make versus to buy. If the variable cost is less than the price that has to be paid to an outside supplier, it may be better to manufacture than to buy.2. Production planning;The C-V-P analysis helps in planning the production of items giving maximum contribution towards profit and fixed costs.3. Cost control:As a cost control device, the C-V-P analysis can be used to detect insidious upward creep of costs that might otherwise go unnoticed.4. Financial structure:Break-even analysis provides an understanding of the behaviour of profits in relation to output. This understanding is significant in planning the financial structure of a company.5. Conditions of uncertainty:When some reasonable basis for subjective extrapolation is available, the breakeven analysis provides the financial management with information helpful in its decision-making activities.

Limitations:The following limitations of break-even analysis have to be kept in mind while making use of this tool:1. Many costs and their components do not fall into neatly compartmentalized fixed or variable cost categories as they possess the characteristics of both types.2. If company sells several products, the financial manager has to prepare and evaluate a number of profit-graphs covering integrated segments of independent activities.3. A break-even chart represents a short-run static relationship of costs and output and become obsolete very quickly.4. The relations indicated in the break-even chart do not help for all levels of operations. Costs tend to be higher than shown on the static break-even chart when the plants operation approaches 100 percent of its capacity.5. The frequent changes happening in the selling price of the product affect the reliability of the break even analysis.6. The cost of securing funds to expand is disregarded in break-even chart.In spite of the above mentioned limitations, the breakeven analysis has high place in financial management.