Solution:

Breakeven analysis:

• Breakeven analysis is an important tool for profit planning in the hands of management.

• It is usually desirable to have a low break-even point; the fewer chances are of operating the business at a profit over the years.

  

• For example, in managing a hotel, a comfortable position can be had if the break-even point is at 60 percent of capacity if it is at 90 percent of capacity.

• Further, if an undertaking is operated close to the break-even point, slight changes in business environments are likely to result in losses.

• The profit performance of a business can be improved by increasing volume,
  increasing selling price, decreasing variable costs, and decreasing fixed costs.

• Taking some of the interrelationships of these four possibilities into consideration, one of the feasible things can be selected.

Non-linear break-even analysis:

• In break-even analysis, linear (straight line) relationships are generally assumed. Introducing non-linear relationships complicates matters slightly, yet it is easy to extend the analysis in this manner.

• For example, it is reasonable to think that increased sales can be obtained only if sales prices are reduced.

  

• Further, empirical studies suggest that the average variable cost per unit falls over some range of output and then begins to rise.

• These assumptions are illustrated in the following figure. There we see a loss region when sales are low, then another loss region at very high output levels.

Merits of Breakeven analysis:

❖ Measure profit and losses at different levels of production and sales.

❖ Predict the effect of changes in sales prices.

❖ Analyze the relationship between fixed and variable costs.

❖ Predict the effect of cost and efficiency changes on profitability.

Demerits of Breakeven Analysis:

❖ Assumes that sales prices are constant at all levels of output.

❖ Assumes production and sales are the same.

❖ Break-even charts may be time-consuming to prepare.

❖ It can only apply to a single product or a single mix of products.