What Is Breakeven?
Breakeven (Point): the level of output at which fixed and variable costs are just covered. Sales beyond this level bring profit.
At any price, there will be a quantity of sales that is just enough to balance the books and above which the business will become profitable. Breakeven analysis indentifies this quantity.
As long as the price is above the cost of variable costs, each sale will make a contribution towards ficed costs or profit.
Unit contribution = selling price - variable costs
Breakeven is when the contribution is equal to the amount of fixed costs.
Breakeven point = fixed costs/contribution per unit
Advantages of Breakeven Analysis
The value of breakeven analysis is that you are now able to work out how much you have to sell to equal the costs of production, and whether you are likely to reach that number of sales.
If you want a margin of safety to allow for unanticipated costs or minor problems, or to target a certain profit each day, you will need to sell more.
Will people still want to buy your product to produce the margin of safety? That depends on the competition and how much there is.
Another function of breakeven analysis is to generate pertinent questions for market research. If you get a breakeven exam question, it is best to be explicit about assumptions you make and to identify extra information that would be helpful.