Discuss the various uses for break-even analysis

Length: 3 Pages 792 Words

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...


(Scott, 1998) But the automobile company has more areas of potential profit making, as well as more areas on its books to accrue potential losses, because of costs it must put into its production. Discuss the limitations of financial leverage. What does risk taking have to do with the use of operating and financial leverage' The lender takes a risk lending money to the firm. Explain how the break-even point and operating leverage are affected by the choice of manufacturing facilities (labor intensive versus capital intensive). utomobile industry also has a greater proportion of fixed costs than the utility industry, and thus may be less attractive in terms of securing financial leverage. Financial leverage is the name given to the impact of on a firm's financial returns, of the change that occurs to the firm's assets when that change is financed with borrowed money. Operating leverage is the name given to the impact on the firm's operating income that occurs with a level of change in the firm's level of output. How does the interest rate on new debt influence the use of financial leverage' The lower the interest rate, the more attractive it is to borrow from a lender, and thus the greater the potential attractiveness of financial leverage. Regardless of the firm's profitability in any given year, the firm must pay interest on a loan, which does not change at a rate dependent upon the state of the economy and the firm's success. (Scott, 1998) Also, if a high percentage of a firm's costs are fixed, and hence do not decline when demand decreases, and operating costs remain high, this increases he company's overall potential business risk. In operating leverage, the firm takes a risk in increasing the level of output to maximize profits and minimize costs of production per unit, or decreasing the level of output to minimize operating costs. (Scott, 1998) What role does depreciation play in break-even analysis based on accounting flows' 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 of current operating resources and the physical fixed costs of the business must be taken into consideration. Capital is not factored into a abreak even' analysis.