Definition of Break-even Point
The break-even point is the level of sales where a company’s income statement will report exactly zero net income. The level of sales can be stated in dollars or in units of products if the products are similar.
The break-even point could be determined by using an electronic spreadsheet or by using a formula. The key is to determine how each of the company’s costs and expenses behave in order to compute the total amount of fixed costs and the contribution margin ratio (or the contribution margin per unit). The contribution margin ratio is sales minus the variable costs and expenses divided by the sales.
Examples of Ways to Reduce the Break-even Point
The break-even point will be reduced by any (or any combination) of the following:
- Decreasing the amount of fixed costs/expenses
- Decreasing the per unit variable costs/expenses
- Increasing the selling prices without causing a decrease in sales
- Redesigning products to provide additional features that will allow for price increases and/or a reduction in variable costs/expenses
