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The Breakeven Point in Finance

What is the breakeven point in finance? What decisions does the breakeven point help an organization to make?

Simply stated, the breakeven point is where a company has hit that mid-point between being in the positive and negative. For instance, companies typically start out in debt as it takes money to fund the start-up, but takes a while to make enough money to match the start-up costs. Often, the most difficult times for companies is this initial starting point, where the negative outweighs the positive. By hitting the break-even point in this scenario, they are finally to the point of making profit. However, there are multiple applications of the breakeven point. Break-even quantity of output is where outputs in units results in an EBIT level equal to zero. As our reading states, break even points help two things: 1) Determine how much output has to be sold to cover operating costs, different from financial costs, and 2) calculate EBIT at different levels of output.

Other applications consist of Capital Expenditure Analysis – the model shows here (roughly) what sales volume is needed to show beneficial; pricing policies – product prices are set to achieve or maximize the EBIT level; labor contract negotiations – calculating the increase in cost that happen from larger wages; Cost structure – comparing fixed costs versus variable costs; and financing decisions – comparing operating costs to sales to decide on need or desire for financing.  


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