Breakeven Analysis and its Application in the Service Industry

This report provides an analysis of breakeven analysis, specifically focusing on its application within the service industry. It begins by defining breakeven as the point where total revenue equals total costs, with no profit or loss, and highlights the importance of this concept for businesses. The report th...Read More

Solution 2:
Breakeven refers of the point of sales where all the cost has been recovered without any
profit. So it can be said that breakeven it the point of sales quantity (in units) or revenue
(amount) that is essential to need the variable and fixed expenses of the company. Any quantity
below this point will lead to loss. The profit at breakeven sales is always zero (Horngren, 2009).
The formula to calculate the breakeven is: Fixed Cost/Contribution margin ratio
So it is essential to have information on sales revenue, variable cost and fixed cost
incurred in any company. There are different categories of revenue and cost associated according
to the type of industry. So it can be said that profit and loss is the deciding factor to determine
the breakeven point.
In service industry there are revenue generated through sales of service supplies as it is
not in case of manufacturing industries where the sales of goods is the deciding factor. So the
main items of the sales revenue in case of service industry are gross amount received to provide
such services and any other incomes as a part of business activities (Coombs, Hobbs and Jenkins,
2005). Cost of goods sold or expenses can be divided into two parts variable and fixed. Variable
expenses can be raw material used to render such services, labour implied to provide such
services, shipping cost, and sales commission. Fixed expenses can be salaries paid to employees,
rent, telephone expenses and utilities expenses.
So breakeven for service industry will be same as above formula but it is beneficial to
calculate the breakeven in amount not in number in number of services rendered.

References
Coombs, H., Hobbs, D. and Jenkins, E. 2005. Management Accounting: Principles and
Applications. SAGE.
Horngren, C. T. 2009. Cost Accounting: A Managerial Emphasis. Pearson Education India.