Breakeven is the idea that you can calculate the conditions that achieve a minimum
level of profit, generally conditions that at least lead to zero profit. In other
words, analysts usually consider breakeven to have occurred at Profit = 0, although
as discussed in the previous section, sometimes a breakeven may be Profit > 0 to cover
a cost of capital.
Now, if your analytical analysis allows you to define an equation for profit, then
you can often calculate the conditions that achieve breakeven. Say, for instance,
that production levels are your variable of interest. If you know the price, the fixed
costs and the variable costs of production perhaps your simple profit equation is:
Profit = (Production levels * Price) – Fixed costs – (Production levels * Variable
cost)
If breakeven occurs at zero profit then perhaps you are interested in calculating
the production levels required to achieve this. So:
(Production levels * Price) – Fixed costs – (Production levels * Variable cost) =
0
Breakeven production level = Fixed costs/(Price – Variable cost)
Note that in some cases, organizations would demand a minimum cost of capital that
requires a higher-than-zero breakeven. Your finance courses would no doubt have taught
this principle.