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Evaluate the use of break even analysis as a decision making aid.

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Introduction

Evaluate the use of break even analysis as a decision making aid. Break even analysis is an important aid within a firm for managers making decisions on such issues as the impact of a changing environment (alterations to cost or price) on the profitability of the business or deciding weather or not to accept an order for products at prices different from those normally charged. It determines the effects that financial plans such as bank loans would have, a change in the level of production or see if a business plan would be viable. These are the main useses of a break even analysis. The important thing to remember when evaluating the use of breakeven analysis as a decision making aid is to remember that it is purely an aid. ...read more.

Middle

Also through comparing two or more breakeven analysis graphs different business strategies can be evaluated to show the difference in the margin of safety and the profit margins, this is obviously extremely beneficial in decision making. It is also important to remember the simplest positive sides to the breakeven analysis from a firms point of view, which are the cost and time of the breakeven analysis. Its cost is unbelievably low compared to that of other decision making tools such as differentiation or low cost strategies. Also in terms of time all that is needed is to gain the information of the costs and sales of a certain time period. In this way breakeven analysis is also useful for many firms that operate in environments that frequently change. ...read more.

Conclusion

Thus in the long run fixed costs would become variable. Total revenues will not be liner different prices to different customers such as a long term customer with loyalty compared to a new customer, and sales, such as two for one offers, promotions and dropping prices to increase customers would all effect the total cost. Multi faceted firms such as Heinz or black and Decker would find break even to hard and meaningless with the multitude of different products. It is obvious that there are both positive and negative sides to the breakeven analysis as a decision making tool. It is a tool which can be useful to some firms and not tom others. In the short term it is useful for varying markets and so on and on small scale operations, also as a good starting point. But in the long run it is to simplified and does not posses the realties of business life to have a major impact on a decision. ...read more.

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