2.1.3 The break-even point
The break-even point is the point from where a business begins to make a profit and, as such, it is critical to the budgeting process. Once we understand the break-even point of a business we can then plan to exceed this and hope to make a profit.
The break-even point is where all our business costs are equal to the revenue generated by the business. An important point to remember is that if we want to stay in business we cannot aim for the break-even point, we must aim above that point to make consistent profits. This enables the business to build cash in reserve to cover for quite times.
To calculate the break-even point for business operations we must understand what all our costs are , such as rent, wages, and vehicles. All the cost we have in our operation can be separated into two areas or categories. These categories are fixed costs and variable costs.
Fixed costs are any costs that remain constant from week to week Examples of fixed costs include rent, lease payments and depreciation.
Variable costs are the costs that rise and fall with the level of output or production. They may include the cost of power, direct labour, raw materials, and vehicle operating costs such as fuel.
To demonstrate the break-even point we can construct a break-even table.
One of the items the Creek Clothing Company manufactures is socks. The sell price for a pair of these socks is $6.00, fixed costs are $1000 and the variable cost is $1.00 per pair.
Using the table below we can work out the break-even point.
Table 4 Break-Even Table
Number units produced |
0 |
100 |
200 |
300 |
400 |
Revenue ($6 per pair) |
0 |
600 |
1200 |
1800 |
2400 |
Variable costs ($1 per pair) |
0 |
100 |
200 |
300 |
400 |
Fixed costs |
1000 |
1000 |
1000 |
1000 |
1000 |
Total costs |
1000 |
1100 |
1200 |
1300 |
1400 |
Gross profit (loss) |
(1000) |
(500) |
0 |
500 |
1000 |
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