The breakeven point refers to the amount of goods or services an organization must provide during a given period in order for receipts and disbursements to be equal. Any organization is concerned about how much money they are going to have to make in order to breakeven. This breakeven point is different depending on the industry but is a crucial point in setting a goal for the organization to achieve. For example, the breakeven point refers to how many videos the local video store must rent in order to cover operating expenses for the month or how many cars a car dealer must sell to cover their operating expenses. A company not reaching their breakeven point is operating in the red while a company that reaches the breakeven point will begin operating in the black.
The breakeven point is crucial for a business to know. This breakeven point allows a business to determine the point at which to set prices for their goods or services based on supply and demand and to set marketing and sales goals to reach levels at that point or higher. The breakeven point helps a business determine appropriate sale volume, capital purchasing needs, and financing decisions. A business that is deciding whether to make changes to the current cost/sales structure associated with a good or service can use various strategies to determine whether the change will increase or decrease the breakeven point of the item. The breakeven point may provide insight to the business about whether the change is a good one for the organization to make or not.
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