Break – even point is the point where the total cost and the total revenue are equal or even. At that point there is no gain or no loss. At that junction one has broken even, through though opportunity costs have been paid and capital has received the risk – adjusted, expected return. The term break – even is used in cost accounting. The break –even point (BEP) or break even level represents the sales amount, either in unit in terms of quantity or revenue in terms of sales. These are required to meet the total cost, meaning both the fixed cost as well as variable cost of the company. The total profit at break – event point is nil. It is only possible for a company to pass the break – even point if the monetary value of the sales is higher than the variable cost per unit. This means that the selling price of the goods needs to be higher than what the company had paid for the goods which includes both fixed cost and variable cost. Once the company exceeds the break – even point, it starts making profit. The concept of break – even point is used mainly in the financial analysis. The marketers, managers, accountants, entrepreneurs and financial planners, use it. It can be used in all the ventures of the business. It helps employees to pinpoint the required outputs and work in meeting them. The break – even value is not a generic value and keeps on varying according to the company. Different companies have different break – even point, some higher or some lower. It is vital that every organization calculate their break - even point, so that they get to know how much number of units they require to sell to meet their variable cost. Every sale would make contribution to the payment of fixed cost. If the organization thinks that they are unable to sell the required number of units, they would reduce the fixed costs. That can be obtained by decreasing the rent payment and through efficient management of bills and other costs and by reducing variable cost. Variable cost can be reduced by getting a supplier who will provide materials at a less price. Both way the organization can reduce the break – even point. The main purpose of break – even analysis is to find out the minimum output required that the organization must exceed for it to make profit. It acts as a indicator of earnings. An organization can analyze the ideal output levels on the amount of sales and revenue that would meet and exceed the break – even point. If an organization is not able to fill full this level, it becomes difficult to carry on the operation. The break – even point is the simplest analytical tool. Highlighting a break – even point aids in having a overview of the relationships between profits, costs and sales. For example, calculating break – even sales as a percentage of actual sales can help managers know when to expect to break even. The break – even point is a special case of Target Income Sales, where the target income is 0. This is vital for financial analysis. Any sales made past the break even point can be considered for profit, after all the initial costs have been paid. The break – even analysis would provide data that can be used by the marketing team, so that they can increase the sales. It also aids the organization to look out for where they can cut costs or re – structure for proper results. This would help the organization to become more efficient and get higher returns. Many times, if a business venture wants to enter a market it is suggested that they calculate a break – even analysis to suggest the financial backers that the business has the potential to be viable.
The break – even point (BEP) in terms of unit sales (X) can be directly computed in terms of Total Revenue (TR) and Total Costs (TC) , when marginal costs and marginal revenues are constant.
Total Revenue = Total Cost
P*X = TFC +V*X
P*X-V*X = TFC
(P-V)*X = TFC
X = TFC/ P-V
TFC is Total Fixed Costs
P is Unit Sale Price
V is Unit Variable Cost
The quantity, (P-V) is called the Unit Contribution Margin (C). it is the marginal profit per unit. Thus the break – even point can be more simply computed as the point where Total Contribution= Total Fixed Cost.
Total Contribution = Total Fixed Costs
Unit Contribution *Number of Units = Total Fixed Costs
Number of Units = Total Fixed costs/ Unit Contribution
To calculate the break – even point in terms of revenue in place of Unit sales, it can be calculated as:
Break – even ( in Sales) = Fixed Costs /c/p
R = C
Here R is the revenue generated and C is the total cost incurred, which includes Fixed Cost and Variable cost.
Q*P = TFC +Q*VC
Q*P-Q*VC = TFC
Q*(P-VC) = TFC
Or Break Even Analysis
Q = TFC/ C/S ratio = Break Even
The no. of units is on X – axis and the amount is on Y – axis. The red line represents the total fixed cost of ₹ 100000. The blue line represents revenue per unit sold. For example, selling 10000 units would generate 10000 * ₹ 12= ₹120000 in revenue. The yellow line represents total cost i.e fixed and variable cost. For example, if the company sells 0 units, the company would incur ₹ 0 in variable costs but ₹100000 in fixed costs for total costs of ₹100000. If the company sells 10000 units , it would incur 10000 * ₹ 2= ₹20000 in variable costs and ₹ 100000 in fixed costs for total costs of ₹ 120000. The break even point is at 10000 units. At this point, revenue would be 10000 * ₹ 12 = ₹ 120000 and cost would be 10000 *2 = ₹ 20000 in variable costs and ₹ 100000 in fixed costs.
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