Question

Explain break-even analysis, its purpose, and whether break-even analysis can be used in manufacturing and/or service industry.

Answer 1

In break-even analysis, that point of revenue is determined at which the company breaks even ie, makes no profit or loss but has only recovered all its costs. Break-even is denoted by fixed cost/(price - variable cost)

The main purpose of conducting a break-even analysis is to determine the minimum number of units at which the company will make a profit. This also helps a company in determining the margin that it has in case number of units or price or costs vary. Determining the break-even point helps a company to make decisions on pricing, bids, etc.

Break-even analysis is useful for manufacturing as well as service industries as both industries aim to lower fixed costs so that the break-even point reduces and profit is achieved at minimum level of revenues. Manufacturing industry has a clearer distinction between fixed and variable costs, however, these costs are equally important in the service industry even if sometimes it is difficult to distinguish between the two. For example, in a restaurant, since demand is not known, knowing when to deploy chefs and other personnel and in what numbers is a challenge. The wages for these employees is fixed cost. However, for on-call employees, wages can be classified as variable costs. Basically, the challenge in both industries remains the same which is to minimize the number of units of production/service which will result in profit.