In this assignment, I will evaluate the reliability of break-even analysis in estimating budgeted activity levels for a selected organisation.
Break – Even Analysis
Break even analysis is reliable as it is made from the budget and it gives a financial structure to the business. The data used for break-even, the business try to make the data as accurate as possible. They make this data depending on the previous year’s financial report. That’s why break-even is reliable to estimate current year’s results. In a short run, break-even analysis can be accurate.
There are some limitations of break-even as well. For example, it cannot give accurate results if the data used for it ...view middle of the document...
Either more than one break-even chart has to be made or the analysis will show a wrong result.
Although, break-even is very helpful for a company to see where they are and how much improvement they can make, the company can never say that it is 100% correct as change in costs or selling price can affect this analysis greatly. Also, in the short-run break-even analysis can show an accurate figure where as in a long run, it will be a lot more difficult. So, break-even analysis is not that accurate.
Costs & Income
Income and cost changes because of different levels of activity they carry out in the business. If the sales of the business increase so will the cost. This is because; more production will take place for more sales. Income and cost can be changed by fashion as well. The business will need to be up to date with the fashion. This change will increase the cost as well. But if the business can be up to date, it will bring a higher income as their products going to be popular.
Expansion of the business can be another factor of an increase in costs. This will increase the income as the business can now have more departments or more space to place more products. This will increase their selling and income. An increase or decrease in labour and material costs will increase total cost hugely. Getting supplied with more material or employing more people will increase the costs, this will then mean that the company will have to produce and sell more products which will increase the income.
Without costs, a business cannot sell products to earn money for the business. Costs like direct labour and material are essential for the business, without them, nothing can be produced and sold. Other costs such as technology or expansion are not essential but it can boost the income of the business. Finally, the business will have to spend some money to be up to date with the fashion to keep their income high. This will all effect on the break-even analysis. This is because cost and income are one of the main parts of break-even analysis. Without analysing them, break-even analysis is impossible.
Stock is one of the most risky current assets to hold. Stock can get damaged or go out of fashion quickly. If stock is not sold, the business will lose a lot of money. Also, if the company produces a higher amount of products, they may not have space to place them on the shop floor. So, they are not going to be sold. Also, it is...