A break-even analysis is the determination of the relationship between revenue, profit and both fixed and variable costs. Fixed costs are theoretically unalterable, no matter what increases or decreases in sales occur during the recorded fiscal period. Rent is the perfect example. Regardless of whether sales rise or fall, rent remains the same. Those costs that fluctuate in a direct relation to sales are variable costs.
Purchases are an example off true variable cost, fluctuating as sales change.
Many costs are not consistently either fixed or variable. These items must be broken down to determine the exact proportion of the cost that is assignable to the fixed or variable list. As an example, direct labor in many small companies does not alter in direct relationship to sales. It may not be possible to reduce the payroll by 20 percent if there is a 20 percent decline in customer count. An individual analysis of the working tasks and payroll history will determine exactly what does happen to the payroll when sales increase or decrease.