The break-even point is a special case of Target Income Sales, where Target Income is 0 (breaking even). For example, expressing break-even sales as a percentage of actual sales can help managers understand when to expect to break even (by linking the percent to when in the week or month this percent of sales might occur). Identifying a break-even point helps provide a dynamic view of the relationships between sales, costs, and profits. The break-even point is one of the simplest, yet least-used analytical tools. If a business doesn't meet this level, it often becomes difficult to continue operation. A firm can analyze ideal output levels to be knowledgeable on the amount of sales and revenue that would meet and surpass the break-even point. It also is a rough indicator of the earnings impact of a marketing activity. The main purpose of break-even analysis is to determine the minimum output that must be exceeded for a business to profit. Reduce the variable costs, (which could be done by finding a new supplier that sells tables for less).Įither option can reduce the break-even point so the business need not sell as many tables as before, and could still pay fixed costs. This could be done through a number or negotiations, such as reductions in rent payments, or through better management of bills or other costs.Ģ. If the business does not think that they can sell the required number of units, they could consider the following options:ġ. As a business, they must consider increasing the number of tables they sell annually in order to make enough money to pay fixed and variable costs. At present the company is selling fewer than 200 tables and is therefore operating at a loss. Each sale will also make a contribution to the payment of fixed costs as well.įor example, a business that sells tables needs to make annual sales of 200 tables to break-even. However, it is important that each business develop a break-even point calculation, as this will enable them to see the number of units they need to sell to cover their variable costs.

Some businesses may have a higher or lower break-even point.

The break-even value is not a generic value as such and will vary dependent on the individual business. Break-even points can be useful to all avenues of a business, as it allows employees to identify required outputs and work towards meeting these. The break-even point is one of the most commonly used concepts of financial analysis, and is not only limited to economic use, but can also be used by entrepreneurs, accountants, financial planners, managers and even marketers. Once they surpass the break-even price, the company can start making a profit. This means that the selling price of the goods must be higher than what the company paid for the good or its components for them to cover the initial price they paid (variable and fixed costs).

It is only possible for a firm to pass the break-even point if the dollar value of sales is higher than the variable cost per unit. Total profit at the break-even point is zero. The break-even point (BEP) or break-even level represents the sales amount-in either unit (quantity) or revenue (sales) terms-that is required to cover total costs, consisting of both fixed and variable costs to the company.

Break even analysis