Break-even is the term to the point where a business is neither making a profit nor loss. Most businesses will want to know their breakeven point in order to be able to quantify the number of sales they will have to make so that they cover all of their costs.
These costs will include both direct (variable costs) and indirect costs (overheads). At the point where income equals these costs, the business is said to have broken even.
Once the break-even point has been achieved, any additional sales made by the business will result in profit provided that the extra sales are transacted at a price which is greater than the variable costs of producing the items.
For example, a business has total costs for the year of £100,000 and after six moths of trading has achieved sales of the same amount. At this stage the break-even point has been achieved.
If one more sale is made for £10 and the additional costs of supplying that item was £4, then not only does that sale result in a contribution of £6, it also lead to a profit of £6.
This is because by reaching the break-even point, all indirect costs have been covered and therefore the only additional costs incurred are the direct costs which go in to producing the extra item.
Where all overheads have been covered by previous income, any additional contribution is also equal to extra profit.
