Break-even Analysis Form
BREAK-EVEN ANALYSIS - 8
IV. PROFIT VS. BREAK-EVEN ANALYSIS
Break-even analysis or profit analysis are not mutually exclusive, both deserve a place in the
manager’s toolbox.
TABLE III
Quick way to determine the bare minimum
for survival of firm?
Break-even analysis
Easy to do “what ifs” (What if TFC is
different? What if AVC is different? What
if P is different?)
Break-even chart
Not much information available? Break-even analysis
(Profit analysis aims at determining the
profit-maximizing level, and thus requires
information about cost and demand at all
output levels)
Emphasis on long run? Profit analysis (Reason: in the long run
there are no fixed costs, and without fixed
costs break-even points are indeterminate)
Most profitable output? Profit analysis
Although a break-even analysis often simpler than a profit analysis, it does not answer many
questions, and the questions that it answers are subject to numerous qualifications.
• Break-even analysis often fails to take into consideration many economic costs and
benefits (especially those, e.g., from R&D, that will not materialize until far into the
future). It is also difficult to distinguish between fixed and variable costs.
• Break-even analysis achieves its simplicity by assuming that both price and average
variable cost are constant. Thus, its results would be erroneous if the firm is not a price
taker and has output-sensitive average cost.
• It is difficult to do break-even analysis for a multiproduct firm, primarily because the
total fixed costs are shared by many products and the product mix changes over time.
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