ed increases in energy prices, which, despite being considered fixed, have created serious problems for financial managers. If we should stick to a stable Contribution Margin, the increase of the Fixed Costs would be set-off by the decrease of the profit and, therefore, of the profit margin. Company performance would be affected only because of the simplified approach imposed by the use of the Contribution Margin concept.
The profit margin is compatible with important changes on the short-term. Company objectives often cause CFO's to take drastic measure in order to satisfy shareholders' demands, short-term growth policies or other similar actions. Suppose a law imposing a progressive profit taxed is emitted. Fiscal consultants may advise for the profit to be diminished and for tax deductible expenses to be maid, in order to avoid payment of higher taxes. The profit margin would suffer important modifications. How is this alteration easily integrated in the concept of Contribution Margin?
The conclusion of this first point is that Profit and Fixed Costs do not have a similar nature. Considering Fixed Costs "fixed" is a simplistic approach. Considering profit "fixed" is a naive approach. Adding the two "fixed" components is an almost useless action. What economic environment is so stable that the evolution of the two elements may be considered accurately predictable and reliable? Although applying this method may not cause any damage to a small family business, a large corporation cannot afford to simply add two numbers (Fixed Costs and Profit), and act only on the information provided by the total. It just isn't doable, because these elements have different natures.
The second point that I would like to make is that the concept of breakeven analysis does not necessarily dictate whether production of a certain object is interrupted or not, should the profit fall below zero. There are numerous reasons for which a company would choose to continue production because losses are set off by gains in promotion or in other sectors.
Some companies base their marketing strategy on one particular product. The Coca-Cola Company would never stop the production of Coca-Cola, even if it would suffer losses, according to a breakeven analysis, simply because the product is the symbol of the entire organization. A company may wish to keep its market share for a while, as it is experiencing various reforms, and then compete at full capacity with rival firms, which have managed to produce at lower costs in the mean time.
Of course, one very interesting thing one might do is to investigate the legal consequences of selling something for a price under the production costs. Anti-dumping regulations may prohibit such an action, especially if it takes place for an extended period of time. Most states have very strict regulations in this area.
The third point I think is worth mentioning is that the whole idea of breakeven analysis is a scholastic simplification of the economic processes which are taking place in an organization. After all, it's no big secret that the price should be larger than the cost, and that the difference between the two is profit. However, the real life brings a few surprises.
For instance, every sensible person would state without hesitation that a company which is suffering losses is on its way to bankruptcy. This is not always true. Losses may be provoked on purpose, or may not even be real (since company books may be falsified in order to avoid paying taxes). Losses are deductible from the profits reported in previous years, so an unscrupulous manager may use this facility to purposely lead the company to start losing money, which will be than compensated with anterior profits.
Expenses may be artificially increased and may become larger than the actual income. The difference is obviously reported as a loss. A loss is not subject to taxes and may even be considered a solution for tax avoidance. The point I am trying to make is that breakeven analysis is not to be evaluated on its own, but also in conjunction with state 