The document discusses that while break-even analysis may seem simple, there is complexity involved when taking a long-term perspective. The break-even quantity equation equates total revenue and costs but projected figures for the future are uncertain and conditions may change. Taking a long-term view would require multiple revaluations of price and costs over time through research, which could be costly and disruptive for small businesses.

1. UNDERSTANDING THE COMPLEXITY OF
SIMPLE BREAK-EVEN QUANTITY
Often than not, the break-even analysis methodology is labeled as simple
because novice users (small entrepreneurial firms) can quickly arrive at the
break-even quantity without much effort, by equating total revenue to total costs.
As such the break-even quantity (QB/E) is shown below:
QB/E = F / (p – v)
F is total fixed cost, p is price of product, and v is unit variable costs, p > v, and
(p - v) is known as the contribution. Definition of p > v presupposes price of
product must be higher than unit variable cost in the short-term for the QB/E to be
positive.
From the above equation, QB/E becomes larger when F increases, v increases or
p decreases, and becomes smaller if F decreases, v decreases or p increases.
A little reorganization of the equation will show that:
QB/E • (p – v) = F
and ∆Q/Q = ∆F/F - ∆(p - v)/(p - v)
Percentage change in break-even quantity is the percentage change in total fixed
cost less the percentage change in contribution. From here, it would therefore be
critical to appreciate that all these figures are projected into the future.
Hence, there is always risk for them coming out differently unless iron-clad
contracts have been made, and unless duration for the application of this
methodology is extremely short (three months or a season) where macro
environment conditions remain stasis. It is unlikely.
Continuing towards more of a long-term perspective (higher revenues), there
would be the need to have several back-to-back valuation-revaluation segments
which may be disruptive and costly as the price and cost would have to be
determined through laborious market and supplier research respectively. Costs
from these activities and enforcement of iron-clad contracts may be too much for
small firms to bear.