Breakeven Analysis
Posted on May 3, 2009 - Filed Under Finance
Breakeven analysis is applied in many different situations, so it is necessary to understand the context to fully understand the meaning of the term break even. Generically, breakeven analyses are used to determine a breakeven point, which is the value of a given input variable that produces some minimum
desired result. In the specific situation at hand, we will use breakeven analysis to determine the volume, called the breakeven volume, at which a business or program or service becomes financially self-sufficient in an accounting sense. In other words, the breakeven point is that volume that generates zero accounting profit. Although the breakeven analysis discussed here is actually part of profit (CVP) analysis, the concept deserves separate consideration. As mentioned in the previous section, the P&L statement format used
here is a four-variable model. When the focus is profit, the three assumed variables are costs, volume, and price, while profit is calculated. When the focus is volume breakeven, the same four variables are used, but profit is now assumed to be known while volume is the unknown (calculated) value. However, it is
also possible to assume a value for volume and price (or costs) and then calculate the breakeven value for costs (or price). A breakeven point can be obtained two ways: algebraically or graphically.
The left side of the breakeven equation now contains the contribution margin, $71.82, multiplied by volume. Here, the previous conclusion that the clinic will break even when the total contribution margin equals fixed costs is reaffirmed. Solving the equation for volume results in a breakeven point of $4,967,462 / $71.82 = 69,165 visits. Any volume greater than 69,165 visits produces a profit for the clinic, while any volume less than 69,165 results in a loss.
Taken From : HEALTHCARE FINANCE
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