Discuss the various uses for break-even analysis

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A new business must know what gross sales volume level it must achieve to reach the break-even point before it can record a true profit. Breakeven analysis determines the operating costs for a business, as well as records its absolute profits. Thus, even a "mature business would be wise to look at their current break-even point and perhaps find ways to lower that benchmark to increase profits. The recent massive layoffs at large corporations are directed at this goal, lowering the break-even point and increasing profits." (Business Town.com, "Break-Even Analysis, 2003) What factors would cause a difference in the use of financial leverage for a utility company and an automobile company' Utility companies are often legal monopolies, controlled by the government, or experience only limited local competition, unlike automobile companies that are private and experience international and national competition. Financially, the automobile company has greater opportunities to expand its profits but also a greater opportunity to experience greater losses in an indeterminate competitive environment. Specifically, in terms of financial leverage, the a Continue...

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(Scott, 1998) But theautomobile company has more areas of potential profit making, as well asmore areas on its books to accrue potential losses, because of costs itmust put into its production. Discuss the limitations of financial leverage. What does risk taking have to do with the use of operating and financialleverage'The lender takes a risk lending money to the firm. Explain how the break-even point and operating leverage are affected by thechoice of manufacturing facilities (labor intensive versus capitalintensive). utomobile industry also has a greaterproportion of fixed costs than the utility industry, and thus may be lessattractive in terms of securing financial leverage. Financial leverage isthe name given to the impact of on a firm's financial returns, of thechange that occurs to the firm's assets when that change is financed withborrowed money. Operating leverage is the name given to the impact on thefirm's operating income that occurs with a level of change in the firm'slevel of output. How does the interest rate on new debt influence the use of financialleverage' The lower the interest rate, the more attractive it is to borrow froma lender, and thus the greater the potential attractiveness of financialleverage. Regardless of thefirm's profitability in any given year, the firm must pay interest on aloan, which does not change at a rate dependent upon the state of theeconomy and the firm's success. (Scott, 1998) Also, if a high percentage of afirm's costs are fixed, and hence do not decline when demand decreases, andoperating costs remain high, this increases he company's overall potentialbusiness risk. In operating leverage, thefirm takes a risk in increasing the level of output to maximize profits andminimize costs of production per unit, or decreasing the level of output tominimize operating costs. (Scott, 1998)What role does depreciation play in break-even analysis based on accountingflows' Based on cash flows' Which perspective is longer-term in nature'Depreciation must be figured into any long-term analysis of resources. When determining when a company will break even, the depreciation ofcurrent operating resources and the physical fixed costs of the businessmust be taken into consideration. Capital is not factored into a a"break even' analysis.


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