What is the Breakeven Point?

by Linda Coors on February 15, 2013 · 0 comments

Read Frank Ross’s response when asked what he means by the breakeven point.

The Breakeven Point is the sum of all the costs that I have in a particular environment. If I were selling a widget, it would be the cost of making that widget plus all of the support expenses I apply to it. Add them together. No profit; no loss; that’s my breakeven point.

We look at breakeven points in two fashions:

  1. On an individual job
  2. Insofar as a profit center or the company is concerned as it functions throughout the course of a year

The logic is the same. Breakeven is the sum of the specific costs to produce the service. Add to that the overhead that we will be applying and that is the point whereby I make no money, nor do I have a loss.

However, just knowing our breakeven point is not enough. We can use that concept called Variable Margin Decision Making. I just don’t want to know what that point is where I neither make money nor lose money. I want to know the impact of a decision before I make it. Then I can figure out the answers to questions such as how much business I have to create to pay a new person’s salary and benefits or how much business I have to generate to cover the cost of a new piece of equipment. Or maybe to be competitive in my market I have to reduce my prices by 15%. What do I need to do as far as my revenue stream is concerned to cover that reduction and still make a 10% profit? These are the types of questions we can ask and measure using breakeven analysis.

We can use breakeven analysis to understand impact of decisions before we make them.

Click here to listen to a clip of Frank’s answer.

Gregg Wartgow, editor in chief with Green Industry Pros, wrote a great article about this on their website here.

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