Break-even analysis can help a manager compare location alternatives on the basis of quantitative factors that can be expressed in terms of total cost (see Supplement A, “Decision Making”). Given a set of potential locations for a facility, break-even analysis is particularly useful when the manager wants to define the ranges of volume over which each alternative is best. The basic steps for graphic and algebraic solutions are as follows:
Determine the variable costs and fixed costs for each potential site. Recall that variable costs are the portion of the total cost that varies directly with the volume of output. Recall that fixed costs are the portion of the total cost that remains constant regardless of output levels.