The meaning of the term ‘break-even point’ What does it actually mean when we say an organisation…

The meaning of the term ‘break-even point’ What does it actually mean when we say an organisation has broken even? It means that the organisation has made neither a profit nor a loss. That is, its total revenues equal its total costs (for our analysis, we have broken these costs up into their fixed and variable components).

Why should managers know the break-even point? Managers need to know the break-even point as it allows them to understand what level of activity must be reached before they can start making a profit. They can then determine whether this required level of production, or service, is feasible. Further, by knowing the break-even point, they can determine whether there is much of a margin of safety between current production and sales levels and the calculated break-even point. That is, how many sales could be lost yet the organisation remains profitable? (We focus on the margin of safety in the next section.)

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