Definition of Break-even Point
The break-even point is the sales volume or sales revenue that is needed to cover the company's expenses. In other words, it is the point where the company will have exactly zero net income.
To assist in the understanding of a company's break-even point, its expenses are sorted into fixed expenses, variable expenses, and semivariable or mixed expenses.
Examples of Causes for an Increase in the Break-even Point
Some of the reasons why a company's break-even point will increase are:
- An increase in the company's fixed expenses. These include rent, depreciation, salaries of managers and executives, etc.
- A reduction in the contribution margin. Contribution margin is sales minus the variable expenses. Hence, an increase in the variable expenses without a corresponding increase in selling prices will cause the contribution margin to be reduced. With less contribution margin, the company will need more sales to cover its fixed expenses.
- A reduction in the contribution margin caused by a decrease in selling prices.
- A less favorable sales mix. Since some products (and services) have lower contribution margins than others, if a greater proportion of the lower contribution margin items are sold, the company will need to sell more units, thereby increasing the company's break-even point.
