Break Even Analysis - Definition & Example
What is Break Even Analysis?
Break even analysis is an 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. Break even analysis is examined against the cost of resources employed by the company.
In break even analysis, companies can evaluate parameters like break even pricing i.e. the price required to achieve the the break even point. It also helps to determine the units break even required to be sold.
However, the break even analysis 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.
Advantages of Break Even Analysis
1. Break even analysis can be interpolated to find the changes in profit levels and break even points upon changes in fixed costs, variable costs and commodity prices.
2. It is useful in capital budgeting techniques.
3. It represents the minimum amount of sales necessary to prevent losses.
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Disadvantages of Break Even Analysis
1. The classification of costs into fixed and variable is not very clear.
2. Break even analysis is suited only to the analysis of one product at a time.
Example of Break Even Analysis
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:
Break even number of employees = (500000)/ (25000 - 15000) = 50
The HR manager can then use this analysis to aid his/her recruiting decisions.
Hence, this concludes the definition of Break Even Analysis along with its overview.
This article has been researched & authored by the Business Concepts Team. It has been reviewed & published by the MBA Skool Team. The content on MBA Skool has been created for educational & academic purpose only.
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