Talk to business owners and one of the key pieces of information they require is to know the break even point of their business, that is the volume of sales it needs to achieve to cover costs. By having this information managers/owners will get some idea of the performance of the business in that period plus they will have the comfort of knowing at what point all the periods costs have been covered.
How do you calculate it?
The key to determining the break even point of a business is to understand the behaviour of costs, it needs to establish what it's variable costs are (those costs which move in line with operational activity eg. material costs, direct wages etc..)and what it's fixed costs are (those that remain static irrespective of changes in activity eg. rent, rates, salaries etc..). Think of your telephone bill, the line rental charge remains static each month irrespective of how much you use the telephone (fixed cost) the calls charge varies depending on how much you have used the telephone (variable cost).
Once you have determined what your variable costs are you subtract the variable cost per unit from the selling price per unit and that gives you the contribution per unit. The next step is to divide the total fixed cost for the period by the contribution per unit, this will give you the break even point
Example
Sell price per unit (£20)- Var.cost per unit (£12)= Contribution (£8)
Total fixed costs for period £12,000
£12,000/£8 = 1,500
By producing 1,500 units @ £8 it will cover the fixed costs of £12,000 and the business will be in a break even position.
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