Break-Even Analysis

Posted in Marketing and Strategy Terms, Total Reads: 1801
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Definition: Break-Even Analysis

Break-even analysis is a kind of analysis used to determine the level of sales of a company for which the profit is zero, i.e. the point of transition from loss to profit. It is examined against the cost of resources employed by the company.


However, this concept is more frequently applied in the field of marketing, finance and operations than HR. But gradually, HR managers are also beginning to employ this technique to assess the productivity of employees and the payoff associated with joining of an employee. This method is similarly employed to calculate the period after which he / she will begin to yield absolute profit for the company after having accounted for fixed costs viz. training and variable costs viz. salary. Thus it has become an important and easy-to-use tool for taking and communicating recruitment decisions.

 

Example

Say a marketing company predicts each of its sales executive will generate a sales amounting to $25,000 per month. Let the salary (variable cost) of each sales executive be $15,000 per month. Also the fixed cost of training for the whole sales will be $500,000. Then the minimum (break-even) number of employees needed by the company to have just zero profit is given by:

 


The HR manager can then use this analysis to aid his/her recruiting decisions.


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