Breakeven analysis is performed to determine the value of a variable or
parameter of a project or alternative that makes two elements equal, for
example, the sales volume that will equate revenues and costs. A breakeven
study is performed for two alternatives to determine when either alternative
is equally acceptable, for example, the replacement value of the defender
in a replacement study that makes the challenger an equally good choice
(Section 11.3). Breakeven analysis is commonly applied in make-or-buy decisions
when corporations and businesses must decide upon the source for
manufactured components, services of all kinds, etc.
We have utilized the breakeven approach previously in payback analysis
(Section 5.6) and for breakeven ROR analysis of two alternatives (Section 8.4).
The Excel optimizing tool SOLVER, introduced and used most recently in
Chapter 12 to select from independent projects, is a prime tool used to perform
a computer-based breakeven analysis between two alternatives. This
chapter expands our scope and understanding of performing a breakeven
study.
Breakeven studies use estimates that are considered to be certain; that is,
if the estimated values are expected to vary enough to possibly change the
outcome, another breakeven study is necessary using different estimates.
This leads to the observation that breakeven analysis is a part of the larger
efforts of sensitivity analysis. If the variable of interest in a breakeven study is
allowed to vary, the approaches of sensitivity analysis (Chapter 18) should be
used. Additionally, if probability and risk assessment are considered, the
tools of simulation (Chapter 19) can be used to supplement the static nature
of a breakeven study.
This chapter’s case study focuses on cost and efficiency measures in a public
sector (municipal) setting.
