TABLE OF CONTENTS Break-even analysis is an inexpensive screening tool used by logisticians to determine the level of spare parts sales needed in order to achieve the break-even point. It approximates how many items must be sold in order to cover costs at the point where profit equals cost. It can also be used to determine the level where sales need to be achieved in order to make a specific profit target. Break-even analysis provides a measure for designing product specifications and permits comparison of possible designs before the specifications are frozen.
Break-even sales analysis is a simple business decision-making tool that deals intelligently with areas of uncertainty, such as demand rates. This assessment methodology can indicate whether or not a more intensive/expensive analysis is required. The variables used to determine the break-even point are discussed in the following sections.
Fixed costs are those that remain the same regardless of sales levels. Depending on the type of business, some typical examples include
Salary of permanent full-time workers
Plant and equipment expenses
Business licenses
Interest on debt
Insurance
Rent
Variable costs are those that increase directly in proportion to the level of sales in dollars or units sold. Depending on the type of business, some examples include
Wages of part-time or temporary employees
Costs of direct materials or supplies
Sales or production bonuses
Cost of goods sold
Sales commissions
Shipping charges
Delivery charges
The unit price is the sales price...
