The study of the interrelationships between costs, sales volume, and prices at various levels of activity. The breakeven point is the time at which the fixed and variable costs involved in the production and distribution of a product are matched by its overall sales: the point at which total costs are exactly equal to revenues. Beyond this point, when revenues exceed total costs, there lies profitability.
To understand the breakeven analysis it is necessary to appreciate fixed and variable costs:
Examples of costs that are typically ‘fixed’:
Examples of costs that are typically ‘variable’:
In physical volume terms, the usual formula for the breakeven point is:breakeven point=Fixed cost(Sales revenue-Variable cost)/Units sold
The main purposes of a breakeven analysis for a marketer are to provide information about cost behaviour for new product marketing activities and to determine specific decision-making. A marketer of a new product needs to know what volume of sales is needed at any given budgeted sales price in order to break even. The product marketer needs to identify the ‘risk’ in the budget by measuring the margin and to calculate the effects on profit of changes in variable cost, cost of sales ratios, sales price, and volume and product mix.
Care should be taken in applying the breakeven analysis to real-life marketing, particularly in a dynamic market environment. The breakeven point contains some risky assumptions: for example, sales prices are assumed to be constant and fixed costs are assumed to remain stable. A breakeven calculation only holds for circumstances where efficiency remains constant, notwithstanding increased productivity. Since there is a direct relationship between purchases and sales, then all that is manufactured can actually be sold and the sales and marketing mix will be maintained at the same levels throughout the initial launch.
Although the breakeven analysis lends itself to product marketing, it can also be applied to services. For example, if a company is arranging a large entertainment event, it is important to know how the fixed and variable costs of producing and marketing the event are linked to the sale of tickets to the event. Dividing the fixed and variable costs of an event will give an indication of how many tickets need to be sold and at what price in order to make the event break even.