Break Even Point

1. Break Even Point: It means the point of no profit and no loss. BEP is the volume of output or sales at which the total cost is exactly equal to the revenue. Below BEP the concern makes losses, at the BEP, the concern makes neither profit nor loss, above BEP, the concern earns profits. BEP is calculated in terms of units or value. Thus

BEP (in units)  =        Fixed Cost                  =      F           
                            Contribution per unit             S – V
 BEP (in Rs.)   =       Fixed Cost          x  Sales    =    Fixed Cost 
               

Break-even Point Equation Method

Break-even is the point of zero loss or profit. At break-even point, the revenues of the business are equal its total costs and its contribution margin equals its total fixed costs. Break-even point can be calculated by equation method, contribution method or graphical method. The equation method is based on the cost-volume-profit (CVP) formula:

px = vx + FC + Profit

Where,
p is the price per unit,
x is the number of units,
v is variable cost per unit and
FC is total fixed cost.

Calculation

BEP in Sales Units

At break-even point the profit is zero therefore the CVP formula is simplified to:

px = vx + FC

Solving the above equation for x which equals break-even point in sales units, we get:

Break-even Sales Units = x =	FC
	p − v

 

BEP in Sales Dollars

Break-even point in number of sales dollars is calculated using the following formula:

Break-even Sales Dollars = Price per Unit × Break-even Sales Units

Example

Calculate break-even point in sales units and sales dollars from following information:

Price per Unit	$15
Variable Cost per Unit	$7
Total Fixed Cost	$9,000

Solution

We have,
p = $15
v = $7, and
FC = $9,000

Substituting the known values into the formula for breakeven point in sales units, we get:

Breakeven Point in Sales Units (x)
= 9,000 ÷ (15 − 7)
= 9,000 ÷ 8
= 1,125 units

Break-even Point in Sales Dollars = $15 × 1,125 = $16,875
        Contribution per unit                PV Ratio