Break-Even Point Definition
Break-even point is the level of production where the total revenues and total expenses of the company are equal. At the BEP, the revenue of the company by the sale of manufactured products is equal to the total costs incurred in manufacturing the product. In accounting terms, at this point, the total profit of the company is zero. So it is a situation where there is no profit, no loss to the company.
Take an example for BEP, if the total revenues of ABC Ltd. are $ 7,000 and total expenses also equal to $ 7,000, we can say that ABC Ltd. is working at the BEP
- The formula to calculate the break-even point in terms of the number of units is:
Break-Even Point in Units = Fixed Cost / Sales Price Per Unit – Variable Cost Per Unit
There is another and more simplified formula for calculating the BEP in terms of a number of units. That is,
Contribution Margin Per Unit = Sales Price Per Unit – Variable Cost Per Unit
Let us understand the meaning of contribution margin in brief. Contribution margin means revenue minus variable expenses. With contribution margin, you come to know, how much of company’s revenue will be available to pay for the fixed expenses and to generate the net income.
- The formula for calculating BEP in terms of money is:
Break Even Point = Break Even Point in Units x Sales Price Per Unit
Calculate the BEP in terms of dollars and sales unit from the information given below:
Fixed Cost: $ 10,000
Price Per Unit: $ 20
Variable Cost Per Unit: $ 10
Let us put the given information in the formula for calculating the BEP in terms of sales units:
Break Even Point in Units = Fixed Costs / Sales Price Per Unit – Variable Cost Per Unit
= $ 10,000 / $ 20 – $ 10
= 1,000 units
Break Even Point in Terms of Money = Break Even Point in Units x Sales Price Per Unit
= 1,000 x $ 20
= $ 20,000
Break-even point is useful in a lot of situations like:
- It helps to determine the impact on profit if physical labor (variable cost) is substituted by automation (fixed cost).
- It helps to determine the effect of the change in the price of a product on the profits.
- If at any point the business suffers a sales downturn, BEP determines the number of losses that a business could sustain.
- It helps to determine the maximum profit that can be earned with remaining capacity left after reaching the BEP
Every business functions to earn profits. If it is unable to earn a profit, it aims to break-even. BEP is a point where revenues and expenses of a business are equal, and it is the next best position of a company which is not earning profits. It is the minimum point, below which the company will start incurring losses, so the management of the company strives towards working above the BEP.1–3