Breakeven volume is a term often used in business to refer to the total number of units of a given product that must be sold at a certain price in order to completely cover the costs associated with that product. The idea is to not only reach this volume, but to exceed it so that the business can enjoy some type of profit from the production effort. Identifying this figure is important to the business operation, since projecting the breakeven volume can help company owners determine if the anticipated demand for a product is likely to be sufficient to generate enough revenue to make the manufacturing effort worthwhile.
Calculating the breakeven volume begins with knowing the total costs involved with the production and sale of an individual unit of a good or service. This figure represents the absolute minimum that must be recouped on each unit produced in order to cover the costs of production and all other related costs. From there, it is important to determine the number of units that must be produced in order to keep expenses at that figure. Finally, businesses will set sale prices above the unit cost per unit and then determine how many of the finished units must be sold before all expenses are covered and the sales efforts begin to generate profits for the operation.
Identifying the breakeven volume is very important to the financial well-being of any type of business. By projecting potential sales in relation to production costs, the company can determine if the anticipated demand will be sufficient to generate enough cash flow to make the production viable. While a product may be of high quality and able to be produced at a reasonable rate, this does not necessarily mean consumers will actually purchase the good or service. Only as the demand is accurately identified and the total amount of revenue generated assessed in comparison to total costs is it possible to ascertain the current breakeven volume.
It is important to remember that a number of factors can cause the breakeven volume for an established product to change over time. Increases in raw materials could significantly alter the cost of production, while changes in demand could also have an impact. For this reason, companies will assess the current breakeven volume for established products, determine what has increased or increased the volume since the last assessment and adapt the business operation and the production and sales efforts accordingly.
