Break-even

• Break-even


  The point at which a business is not making a profit or a loss
• Break-even point

  • Total revenue = total costs
  • Business is making neither a profit nor a loss
• Break-even level of output

  The number of units a business needs to sell to cover their total costs from their total revenue
• Break-even graph

  Plots costs and revenues against output, showing what total revenue, fixed costs and total costs are expected to be at each level of output
• Fixed costs


  • Expenses a business has to pay which do not change with output, e.g. rent
• Variable costs

  • Expenses a business has to pay which change directly with output, e.g. raw materials
• Reaching the break-even point

  Business will have a margin of safety (the amount by which sales exceed the break-even point)
• Businesses will calculate their break-even point in order to use the information when making decisions
• Break-even


  The point at which a business is not making a profit or a loss
• Calculating break-even quantity

  Fixed costs / (Selling price - Variable cost per unit)
• The result of the break-even calculation is always how many products a business needs to sell in order to break even
• If the break-even result is not a whole number, the business would need to sell an additional item to break even
• Usefulness of break-even

  • Businesses calculate break-even to use the information when making decisions
• Break-even


  The point at which a business is not making a profit or a loss
• Usefulness of break-even in decision making

  • Businesses will calculate their break-even point in order to use the information when making decisions
• Using break-even to make business decisions

  1. New products

  2. Pricing

  3. Costs

  4. Production levels
• Break-even often uses forecasted figures and assumes that the business can sell the units that it produces
• Marketing activities that involve price reductions

  Affect the total revenue received
• If successful, a marketing campaign may lead to an increase in sales that is sufficient to increase total revenue


  This would lower the break-even point
• If prices are reduced and sales fail to increase sufficiently


  Total revenue may fall, resulting in a higher break-even point
• Any increase in costs


  Will lead to an increase in the break-even point
• A change in things beyond the control of a business


  Can also affect the usefulness of break-even
• Break-even is less useful for businesses that provide services, as customers may pay different prices based upon the service they request