A new business must know what gross sales volume level it must achieve
to reach the break-even point before it can record a true profit. Breakeven
analysis determines the operating costs for a business, as well as records
its absolute profits. Thus, even a "mature business would be wise to look
at their current break-even point and perhaps find ways to lower that
benchmark to increase profits. The recent massive layoffs at large
corporations are directed at this goal, lowering the break-even point and
increasing profits." (Business Town.com, "Break-Even Analysis, 2003)
What factors would cause a difference in the use of financial leverage for
a utility company and an automobile company'
Utility companies are often legal monopolies, controlled by the
government, or experience only limited local competition, unlike automobile
companies that are private and experience international and national
competition. Financially, the automobile company has greater opportunities
to expand its profits but also a greater opportunity to experience greater
losses in an indeterminate competitive environment. Specifically, in terms
of financial leverage, the automobile industry also has a greater
proportion of fixed costs than the utility industry, and thus may be less
attractive in terms of securing financial leverage. (Scott, 1998) But the
automobile company has more areas of potential profit making, as well as
more areas on its books to accrue potential losses, because of costs it
must put into its production.
Explain how the break-even point and operating leverage are affected by the
choice of manufacturing facilities (labor intensive versus capital
The break-even point is determined by a company's operating costs, which
include labor. Capital is not factored into a â€˜break even' analysis.
However, the greater the company's proportion of fixed costs, the less
operating leverage it possessesâ...