The break-even point is the volume of sales the business must achieve to cover fixed costs or overheads and at which point no profit or loss is made.
In other words, that’s your ‘break even’.
A business could be turning over a lot of money, but still be making a loss.
Knowing the break-even point is helpful in deciding prices, setting sales budgets and preparing a business plan.
The break-even point calculation is a useful tool to analyse critical profit drivers of your business, including sales volume, average production costs and average sales price.
Advantages of the break-even point include knowing:
- the profitability of the present product line;
- how far sales can decline before losses are incurred;
- how many units have to be sold before it becomes profitable;
- what effects a reduction in selling price or the volume of sales will have on the profitability of the business;
- what the effect on profitability will be if overhead expenses increase; and
- how much more has to be sold at current price levels to make up for an increase in the cost of sales.
Katrina Brennan, Principal, SRJ Walker Wayland Business Growth Advisors, Accountants and Auditors, Level 2/2 Innovation Parkway, Birtinya, 5301 9957, srjww.com.au
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