In simple words, the break-even point can be defined as a point where total costs (expenses) and total sales (revenue) are equal. Break-even point can be described as a point where there is no net profit or loss. The firm just “breaks even.” Any company which wants to make abnormal profit, desires to have a break-even point. Graphically, it is the point where the total cost and the total revenue curves meet.
Break-even point is the number of units (N) produced which make zero profit.
Revenue – Total costs = 0
Total costs = Variable costs * N + Fixed costs
Revenue = Price per unit * N
Price per unit * N – (Variable costs * N + Fixed costs) = 0
So, break-even point (N) is equal
N = Fixed costs / (Price per unit - Variable costs)
About Break-even point
The origins of break-even point can be found in the economic concepts of “the point of indifference.” Calculating the break-even point of a company has proved to be a simple but quantitative tool for the managers. The break-even analysis, in its simplest form, facilitates an insight into the fact about revenue from a product or service incorporates the ability to cover the relevant production cost of that particular product or service or not. Moreover, the break-even point is also helpful to managers as the provided info can be used in making important decisions in business, for example preparing competitive bids, setting prices, and applying for loans.
Adding more to the point, break-even analysis is a simple tool defining the lowest quantity of sales which will include both variable and fixed costs. Moreover, such analysis facilitates the managers with a quantity which can be used to evaluate the future demand. If, in case, the break-even point lies above the estimated demand, reflecting a loss on the product, the manager can use this info for taking various decisions. He might choose to discontinue the product, or improve the advertising strategies, or even re-price the product to increase demand.
Another important usage of the break-even point is that it is helpful in recognizing the relevance of fixed and variable cost. The fixed cost is less with a more flexible personnel and equipment thereby resulting in a lower break-even point. The importance of break-even point, therefore, cannot be overstated for a sound business and decision making.
However, the applicability of break-even analysis is affected by numerous assumptions. A violation of these assumptions might result in erroneous conclusions.