Break Even Analysis as A Management Tool for Decision Making in Babcock University Water Corporation

Abstract

Business and organisational success depends largely on the decision making ability of its management. Decisions regarding forecasting profit and sales in an organisation is often difficult and limited greatly by uncertainty. The study was basically carried out to ascertain if, breakeven analysis is a management tool for decision making. It also investigated, if breakeven analysis can be used to achieve predetermined levels of profit. Hence, the survey research design was adopted, Correlation analysis through the use of SPSS was used to analyse the questionnaires. Also, manual correlation of the cost of production and net income of the case study company, from the review of their four years management accounts was also adopted. From the analysis, there was a positive (though weak) correlation between cost of production and net income and it shows that there is a relationship between both and breakeven is an appropriate tool for management decision making. It was discovered that, breakeven analysis is one of the most reliable methods for management in decision making. Also, changes in any of the constituent elements of the break even such as: output, cost etc. would cause an outright change in all other variables like: level of turnover to breakeven, predetermined level of profit etc. Sensitivity analysis is recommended to be used alongside breakeven analysis in order to be able to easily handle changes in the breakeven point. Breakeven analysis is also best suited for short term decision making, a period of 1-5 years is suitable, as costs change in the long. The importance of proper profit planning and management was also identified.

Keywords: Break-even analysis, decision making, uncertainty, profits, sales, cost, break- even point.

DOI: 10.7176/EJBM/12-21-18

Publication date:July 31^st 2020