Break-Even Point

The level of output or activity at which total revenue equals total cost, so an organisation neither gains nor loses money.

Source: Horngren, Datar & Rajan 2015

It can be stated as a volume of activity, as an amount of revenue, or as a date. The volume form divides fixed costs by the contribution each unit makes towards them. The revenue form divides fixed costs by the proportion of each pound of revenue that remains after variable costs, which suits services where output is not readily counted in units. The date form identifies when cumulative income overtakes cumulative cost, which is the relevant expression for a project with substantial start-up expenditure.

Source: Horngren, Datar & Rajan 2015

In a service funded by allocation rather than by payment for activity, the equivalent question is the volume at which the cost of delivering the service reaches the funds available for it. The arithmetic is the same, with the allocation in place of revenue, and the answer identifies the maximum activity the funding supports rather than the minimum activity required for viability. This inverts the practical use, since the constraint binds from above rather than from below.

Source: healtheconomics.wiki

Because capacity is added in blocks rather than smoothly. A service can cover its costs at a volume its current establishment supports, then require an additional team, room or session to go further, at which point costs step up and the service falls back into deficit until the new capacity is also filled. The result is alternating ranges of viability, so a service can be sustainable at low and at high volume and unsustainable in between, which a single break-even figure conceals.

Source: Gapenski 2015

It gives the minimum volume a proposed service must reach before it is worth establishing, which is a more useful test at the proposal stage than a projected annual position. In contract negotiation it identifies the volume below which an agreed price does not cover the cost of maintaining the service, which is the basis for a block payment covering fixed capacity. It also supports decisions about individual sessions, where the comparison is between the contribution earned and the incremental cost of opening.

Source: Gapenski 2015

Three levers, of which usually only some are available. Reducing fixed costs lowers the point directly and is the hardest to achieve in a service whose fixed costs are staff and premises. Raising the price or tariff lowers it and is generally outside the provider's control. Reducing the variable cost per unit raises the contribution each unit makes and lowers the point, and is where most practical effort goes. Identifying which lever is actually available is the first step, since analyses often recommend the ones that are not.

Source: Horngren, Datar & Rajan 2015