Break-Even Point

Posted by Lydia Le

[NSW-NESA] Stage 6 Business Studies-Preliminary course [Year 11] – The Business Planning Process: Forecasting

Break-Even Point - What is it? 

In business, the term of the break-even point refers to the stage of a business producing its production level to reach the point at which the total revenue equals total expenses.

Let set:

Q = Quantity (the number of outputs: Produced and sold)

We have:

TC = Total Fixed Costs (FC) + Total Variable Costs (VC)

    Where Total Variable Costs = Variable costs per unit  x   Quantity  = vc per unit x Q

TR = [Average] Selling price per unit x Q

At the Break-even point:

    FC  + vc per unit x Q = [Average] Selling price per unit  x Q

or

    FC =  [Average] Selling price per unit  x Q   -  VC per unit x Q  = Q  x ([Average] Selling price per unit - vc per unit)

Hence

    Q = FC /([Average] Selling price per unit - vc per unit)

***Learning this concept through language: "In this business, at the Break-Event point of Q production level, the Total Revenue can cover all Total Costs"

Therefore: 

        -At the Break-Even point, Net Profit is Zero. 

        -At any points showing the production level is greater than Q, the business gets Profit 

        -At any points showing the production level is less than Q, the business gets Loss. [The total costs have not been covered yet].

Why does the Break-Even Point Matter?

Decision-making is always important in any successful organisations and businesses. The Break-Even point holds a crucial role in effectively making decisions which contribute towards the business' success. It allows the business operating managers to make right decisions in constructively controlling, determining and allocating business budgets. These involve the decisions to efficiently arrange the budgeting for the two major business-divisions of the cost-centre, and the revenue-centre. 
The mentioned decisions point out, such as, 1)well-planned determining the quantity of products which need to efficiently be produced, 2)accurately allocating the uses of costs [for both fixed and variable costs], and 3)correctly setting the right unit-price of selling [encompassing the discount, if any]. As a consequence, this helps logically link to a range of further effective decisions relating to the key business functions of finance, operations, human resources and marketing.

Useful and relevant links

NSW Preliminary Business Studies -Topic: Business Planning
(the business planning process-the Syllabus dot-point: forecasting )

My Business Studies site
My Teaching Site: Break Even Analysis