Cost-volume-profit analysis, Popularly referred to as breakeven analysis, is an important tool for profit planning. This analysis deals with fixed and variable costs to revenue when profit planning is made. The name, breakeven chart, has been derived from the concept that the revenue and the total operation cost make a breakeven at certain output or sales volume. At this breakeven point, if one additional unit is sold, it would produce profit. This breakeven analysis can be extended to the analysis including several types of decision factors. The essential feature of such analysis is the comparison of incremental revenues with incremental costs.
Although breakeven analysis is widely used in the area of financial analysis, it has some inherent weaknesses such as; 1) it assumes that the functions of the total revenue and the total operating cost are linear, 2) semivariable costs are not considered, 3) all produced units are sold, 4) its analytical capability is limited to the short term time horizon or one period. All these conditions weaken the applicability of conventional breakeven analysis to most of long term projects.
The purpose of this research is an attempt to make an improvement for the applicability of conventional breakeven analysis. This research suggests modified breakeven procedures as a tool for profit planning and decision rule for multi-period projects.
Serious feature of long term projects is that prices, costs, and sales are varied over the project's life time. Other feature is that inventory, opportunity and semi-variable costs should not be disregarded in the financial analysis of long term profit. This research proposes multi-period breakeven procedures considering the above features for long term projects. One procedure considers the case of determining the minimum time required to cover fixed costs for the project's life time (Model I in this research). The other procedure determines required level of production volume necessary for every sub-period to create a breakeven point at specific time or sales volume (Model II in this research). The procedures are extended to analyze multi-period and multi-product projects.
This research discovers desirable properties that the breakeven point must hold; 1) regardless of the number of sub-periods the breakeven point of a project must be one and stable, 2) the breakeven point of a project must be determined with the consideration of all cash flows over its time period, 3) payoffs of projects having the same life time and total fixed costs must be negatively related to breakeven quantities of projects. This research shows that the breakeven points from multi-period breakeven procedures have the above properties.
