Imagine working for an organization for a few years and, first, you are enjoying the experience. But, as time goes on, the conditions seem to worsen, perks continue to disappear, and the managers’ impatience seems to increase. After another round of layoffs, you find yourself in a management position that finally provides you with an insight into the organization’s finances. You find that for every project your organization takes on; there is an average of a 5% financial loss. You realize that, when pricing was originally determined, the organization did not do its due diligence in determining how many resources it would take to complete a project. The first step toward sustainable and then profitable organization would have been to determine the break-even point for a project. For this Discussion, you will use an example from your professional or personal life to consider the usefulness of break-even analysis to help with your decision making.
Consider an example of how you could use break-even analysis (creativity is welcome!) to help you make a decision in your professional or personal life and how understanding the break-even point could help you make better decisions.
Post an analysis of the usefulness of break-even analysis in supporting decision making, including the following:
Describe an example from your professional or personal life in which you might use break-even analysis to support a decision.
Analyze why and how understanding the break-even point would help in making an effective decision.
In considering your example, identify what elements you might consider improving the break-even point.
The Costs:
Fixed Costs (FC): Costs that remain the same regardless of how many items are printed.
Monthly Subscription for CAD Software: $50
Annual Printer Maintenance (spread monthly): $20
Marketing/Website Hosting: $30
Total Monthly Fixed Costs: $100
Variable Costs (VC): Costs that change with each unit produced.
Resin/Filament Cost per Print: $5 (Averaged across small/large projects)
Electricity Cost per Print: $1
Post-processing/Cleaning Material Cost per Print: $2
Total Variable Cost per Unit (C): $8
Pricing:
Average Selling Price per Unit (P): $33 (Includes design time and printing)
2. Analysis: How Understanding the Break-Even Point Helps Decision Making
The break-even point (BEP) is calculated as:
BEP (in units)=Selling Price per Unit (P)−Variable Cost per Unit (C)Fixed Costs (FC)
Calculation:
Contribution Margin per Unit: $P - C = $33 - $8 = $25
BEP=$25$100=4 units![]()
Decision-Making Insight:
Pre-Launch Decision (Go/No-Go): Before investing in the project, the BEP calculation reveals that I must sell at least 4 custom prints per month just to cover my fixed overhead costs. If my market research suggests selling 4 prints is highly unlikely, the analysis provides an effective "No-Go" decision, saving me time and money.
Operational Decision (Pricing Strategy): If I had initially priced my service at $20, the contribution margin would be $20 - $8 = $12. My BEP would jump to $12$100≈8.33 units. This tells me that the initial pricing was inadequate for the volume I could realistically achieve, forcing a necessary price correction before launch.
Resource Allocation (Target Setting): The BEP provides a clear, measurable goal. The first 4 prints I sell each month go entirely toward covering my fixed costs. I know that only prints sold after the 4th unit contribute to my profit . This allows me to set realistic monthly sales targets (e.g., Target = BEP + 10 units = 14 units).
Sample Answer
The Usefulness of Break-Even Analysis in Decision Making
Break-Even Analysis (BEA) is a powerful decision-making tool because it determines the minimum level of production or sales volume needed to cover all associated costs. This threshold—the break-even point (BEP)—shifts the decision-making process from intuition to quantification, establishing a clear target for sustainability before profitability can be considered.
1. Example: Custom 3D-Printing Service
I can use break-even analysis for a small side business I considered launching: offering a custom 3D-printing and design service for local hobbyists.