Break-even point
The level of activity at which revenue exactly covers all costs. It is calculated by dividing fixed costs by the contribution margin ratio. Also called the profitability threshold.
What it changes for the executive
It is the one figure an executive should know by heart. It turns every commitment decision, a hire, a lease, an investment, into a simple question: by how much does this franc of fixed cost move the threshold at which the year holds? And it announces the reverse: every franc of lost activity takes away a share of profit that grows as fixed costs dominate.
Example
A services company whose variable costs represent only a tenth of revenue has a contribution margin ratio close to ninety per cent. A hire costing 130,000 francs fully loaded moves its break-even point by only 144,000 francs; but ten per cent less activity costs it ninety per cent of those ten per cent in profit.
A term that is missing?
Describe the situation in a few lines; the reply is personal.