What can your manager
do if a break-even analysis indicates that a venture will lose money?
The simplistic answer is that if a manager is looking at a
break even analysis and the analysis shows that the venture will lose money is
to not do the venture.
Realistically though, the answer is more complicated
than that. The simplistic answer assumes that all the variables in the equation
are fixed – static without the possibility of changing. There are three
variables in the equation for the break-even analysis. There are the fixed
costs, the price you are selling your good or service, and the variable costs
included in your service or product. All of these can be examined and perhaps
tweaked so that the anticipated quantity is above the break-even quantity – can
you charge more or pay less for inputs or not rent as big a space.
One thing to
be careful with is that these things are not strictly linear. If you pay less
for inputs like labor, you might not be able to recruit the kind of people you
want; if you try to up the price, you might dampen demand. (At that point,
price and quantity demanded is dependent on the elasticity of demand of the
good, and you’re calling in the economists to see if your estimated new price
will support a break even quantity you expect.)
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