- the level of sales needed for a business to cover all its costs
- Any sales beyond this point contribute to profit!
- a critical financial calculation
- assesses financial performance
- ensures that revenue covers costs to achieve profitability
- At the break-even point total revenue = total costs.
- helps set sales targets
Formula to calculate the break-even point (in units)
Break-even point (units) = Fixed costs/(Price per unit − Variable cost per unit)
- fixed costs = $10,000
- sells a product at $50 per unit
- the variable cost per unit (cost of producing each unit) is $30
- the break-even point = $10,000/($50 − $30) = 500 units
- sell 500 units to cover fixed and variable costs
- !understand the minimum performance required from marketing activities!
- marketing campaign’s $:$ ratio (spendings:sales) indicates high revenue generation? company has not yet reached its break-even point?
– refine cost structure and pricing strategy
– OR scale up marketing efforts to cover all costs and start generating profit.
Setting realistic marketing budgets
- assess how much revenue is generated per $1 spent => set marketing budgets
- how many units or how much revenue is required to cover costs? = how much marketing spend is needed
- return below expectations => reallocate funds to more profitable campaigns
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