Use of Break-even analysis in financial appraisal of projects

Break-even analysis plays an important role in financial appraisal of projects. Preparation of the financial profitability statement is a major mile stone in financial appraisal. This is because of the reason that it involves many assumptions. The assumptions must be realistic. Out of the many assumptions made, the assumption on capacity utilisation for different years is a crucial one since many other parameters in the financial projection depend on this. Suppose a realistic financial projection has been made. The top management is in need of certain key performance indicators (KPI) to monitor. One such KPI is the Break-even point. If the top management has this indicator in hand for every year of operation, it will prove to be a very useful tool in having a check on whether the on-going operations are in order and whether the volume of output being produced/likely to be produced is above the required Break-even volume. This article explores the use of Break-even point as a Key Performance Indicator. Further, the article touches upon the finer aspects of classifying the costs into fixed and variable costs in arriving at the Break-even point.