The break-even point (BEP) for a testing system is a marker for a financial decision maker. It is the test volume where the total revenues for a test or tests in a testing system equal total cost. At the BEP there is neither a profit nor a loss. After the BEP is reached, each additional test will generate a profit. Obviously, the sooner the BEP is reached, the better the financial outlook is for a testing system. The example below describes the break-even calculation.
Capital Equipment Acquisition
Break-Even Calculation
X = (F + C)/ (r – V)
X = Break-even point in number of tests
r = Revenue per reportable or reportable test
V = Variable cost per reportable test
F = Total fixed costs per reportable test
C = Net income contribution (set at zero)
Example:
reportable tests = 100,000
Variable costs = $186,000
Total Fixed Costs = $159,500
Revenue = $1,000,000
r = $1,000,000/100,000 = $10.00
V = $186,500/100,000 = $1.86
F = $159,500/1000,000 = $1.59
C = Net income contribution = 0
X = $159,000/($10.00 – $1.86) = $159,500/$8.14 = 19,595 tests
Fixed costs do not, for a given period, vary with changes in the volume of tests or activities performed. Fixed costs are only fixed in relation to the given period and are only fixed within a relevant range of activity. For example, an instrument may perform 1 - 100,000 tests. Therefore, this is the relevant range of workload assigned.
In most cases, fixed costs will not change based on the number of tests performed within this range in a budget year. An example of a fixed cost is instrument depreciation. If labor does not change relative to this range of tests, it can also be considered a fixed cost.
Variable costs change proportionately with changes in volume of tests performed. Consumable costs such as reagents, calibrators, controls, test cups etc. that are directly associated with each test performed are variable costs. As the number of tests increases, the cost increases by the same amount as related to the variable cost per test.
The net income contribution is the net revenue generated by the instrument. The Net income contribution is set at zero as this is where cost and revenue are equal. This is the break-even point. After the net income exceeds the cost, each additional test brings in net revenue. Comparing break-even points for instruments being considered may be helpful in the selection process.
