Eurostar

This is a situation facing the owners of the Channel Tunnel. When it was built, the firm estimated the construction costs. However, the final cost of building this very complex and challenging project turned out to be very much higher. The variable costs of running the Tunnel are not that high but the firm faces a real problem.

The price it needs to charge to cover the variable costs and start to make a dent in the fixed costs would be so high that users of the Tunnel simply would not pay. The firm are thus in a position where the interest payments on the debt they have built up to build the Tunnel in the first place are higher than the revenue they are receiving from customers paying to use the Tunnel. As a result, the company will find it very difficult to ever break even!

Eurostar trains operate out of St. Pancras station, London. But they must use the Channel Tunnel to get to the Continent. Is this sustainable? © Andreas Hunziker, Stock.Xchng

Sony PlayStation3

Sony is in the process of planning the release of its new PlayStation3 games console. They will have some idea of the cost of developing this new product and also what the costs of building the consoles will be. The development costs are the equivalent of our set-up costs.

Such costs are also sometimes referred to as 'sunk costs'. These are costs that, once spent, are difficult to recover. For example, if a team of engineers spends six months researching a new system for a games console but fails to come up with any workable solution, Sony will have incurred (often) very substantial costs. It can't do a great deal to recover those costs because it has nothing to sell to generate any revenue to do so.

Replacing the PlayStation2 is a major project for Sony. Getting the price right to maximise sales and revenue is important. Break-even analysis can play a part in the planning process. Copyright: Sherief Yousri, from stock.xchng.

What price should Sony sell the new Playstation3 for? It will be looking on the one hand at the prices charged by rival firms such as Microsoft, with its Xbox 360, but it will also have an idea of what sort of return it wants from the years it has taken the firm to develop the product. It can use break-even analysis to get some idea of the likely levels of sales it needs worldwide to break even. This helps enable it to plan its cash flow and its strategy for the product.