Fact Check: Break-even

The Break-Even Point (BEP) in economics, business--and specifically in cost accounting--is the point at which total cost and total revenue are equal, i.e. "even." There is no net loss or gain, and one has "broken even," though opportunity costs have been paid and capital has received the risk-adjusted, expected return. In short, all costs that must be paid are paid, and there is neither profit nor loss.

The 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. Total profit at the break-even point is zero. It is only possible for a firm to pass the break-even point if the monetary value of sales is higher than the variable cost per unit. 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). Once they surpass the break-even price, the company can start making a profit.

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. Break-even points can be useful to all avenues of a business, as it allows employees to identify required outputs (quota) and work towards meeting these.

The break-even value is not a generic value as such and will vary dependent on the individual business. Some businesses may have a higher or lower break-even point. 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. Each sale will also make a contribution to the payment of fixed costs as well.

For example, a business that sells tables needs to make annual sales of 200 tables to break-even. At present the comopany is selling fewer than 200 tables and is therefore operating at a loss. As a business, they must consider increasing the number of tables they sell annually in order to make enough money to pay for fixed and variable costs.

If the business does not think that they can sell the required number of units, they could consider the following options:

1. Reduce the 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 monthly costs.
2. Reduce the variable costs (which could be done by finding a new supplier that sells table components for less).

Either option can reduce the break-even point so the business need not sell as many tables as before, and could still pay for overhead.

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