What is the break-even point ? The break-even point is also known as the break-even point or benefit threshold. The calculation of the break-even point is one of the most elementary things in business administration, since it is the mathematically calculated point at which revenue and costs are the same. At the break-even point, there is no loss, but no profit is made either – whoever does business here is acting completely neutrally without the intention of making a profit. The contribution margin of all sold products is with the fixed costs identical. Losses occur if the break-even point is not reached; if the break-even point is exceeded, profits are generated. The break-even point can be calculated for one or more products. Of course, you can also carry out a break-even analysis for the entire product portfolio.
The break-even point as a break-even point
What does the break-even point say? According to sportingology.com, the break-even point is the break-even point and also the profit limit. In the break-even calculation it represents the zero of the profit function. The profit threshold is the lower zero, while the profit limit represents the upper zero. If the break-even point is reached, profits are generated, while losses are recorded once the profit threshold is reached. In order to make a profit with a product in the future, a company must perform the break-even point analysis. It must be examined how many products have to be manufactured or sold so that the fixed costs can be covered. Furthermore, it must be clarified to what extent sales must be achieved with the products so that the fixed costs can be covered. The break-even analysis is an important tool in corporate planning. Influences of changes in the cost structure can be analyzed, requirements for the sales volume are determined.
The calculation of the break-even point
With the so-called break-even calculation (break-even analysis) a company can determine the level of sales at which all costs are covered. So this is the minimum sales. In order to conduct a break-even analysis, costs must be broken down into fixed and variable costs be broken down and the contribution margin must be known. It is important to note that not only the costs should be constant, but also the sales prices. Either a constant mean of the costs should be used for the calculation or the break-even point should be recalculated every time. The break-even point expresses how much sales can still decline if prices remain unchanged, so that the total costs can still be covered. The break-even analysis can be used to determine how the desired profit targets affect price and capacity utilization. Relationships between price and capacity utilization can also be shown. If the sales revenues are less than the total costs, a company or a product is in the red.
Calculation and graphical representation of the break-even point
If the break-even point is to be calculated, the aim is to determine the amount at which the profit equals zero. The profit is determined by deducting the costs from the proceeds. The winning point is found by using the equations
Zero = revenue minus costs and
Revenues = costs
equates. The break-even point is the point at which revenues and costs are exactly the same. It can be represented graphically. To do this, the graphs of the revenue functions are plotted on a scale. The function of the revenue represents the unit price multiplied by the number of units sold. The total costs are formed from the fixed and variable costs. If the formulas for the revenue are equated, an intersection is created that represents the break-even point. The contribution margin per unit is determined by subtracting the variable costs per unit from the unit price. The break-even point can be shown graphically in a diagram, the relationship between revenue and costs is shown using the number of pieces. The abscissa axis of the diagram shows the quantity, the ordinate axis shows sales,
Relationship between break-even point and payback period
Based on the expected sales volume, the amortization period can be determined using the break-even points. To determine the payback period in periods, the break-even point for the quantity is divided by the expected sales quantity. The break-even point can be used to determine how long it will take for an investment to pay off. From the payback point, an investment – an item from the company’s fixed assets – generates a contribution to profit.
Interpreting break-even analysis correctly
The break-even point is an indicator of the minimum turnover and is a danger signal. It indicates to the entrepreneur that appropriate measures must be taken if sales for a product fall and approach the break-even point. A company can take various measures:
- Boost sales
- Reduce fixed and variable costs
- Remove the product from the range
- Extreme case: shut down production.
Determining the break-even point helps a company avert dangers and identify difficulties early on. When setting up a company and start-up financing, company founders can use the break-even analysis to determine exactly when they are likely to start making a profit and use the break-even point calculation as a target-oriented instrument. This statement is especially important for financiers (banks, investors).