Break-even point

What Is Break-Even Point (BEP)?

The break-even point is the point where a business's total revenue is equal to its total costs. It is the moment when the company is neither profitable nor losing money. It is a crucial milestone for every organization because it enables the company to determine the minimum revenue required to pay its costs.

Definition 2

A key relationship in CVP analysis is the activity level at which total revenues equal total costs (fixed and variable). This level of activity is called the break-even point.

More Thorough Understanding of the Term

The break-even point is where the total revenue received equals total costs associated with the restaurant's output or product sale. At this sales volume, the company will realize no income but suffer no loss. 

The process of finding the break-even point is called break-even analysis. Knowledge of the break-even point is useful to management when it decides whether to introduce new product lines, change sales prices on established products, or enter new market areas.

The break-even point can be expressed either in sales units or sales, and it can be:

  • Computed from a mathematical equation
  • Calculated by using the contribution margin
  • Derived from a cost-volume-profit (CVP) graph.

To calculate the BEP, it is necessary to understand the following terms:

Fixed costs

Fixed costs are expenses that stay constant independent of production or sales volume. Rent, salary, utilities, and insurance are among them.

Variable costs

Variable costs are expenses that vary according to the degree of output or sales. Raw materials, packaging, shipping, and commissions are among them.

Sales price per unit

The price at which a corporation sells its product or service per unit is known as the sales price per unit.

Implications of Break-Even Point

The break-even point might provide helpful information about a company's financial health. A high break-even point indicates that a company must sell many units to cover its costs and may be subject to market shifts such as greater competition or decreased demand.

Conversely, a low break-even point indicates that a company has a high degree of flexibility and can swiftly react to market changes. A low break-even value suggests the company runs efficiently and may create profits with minimal sales.

The break-even point can also assist organizations in making informed pricing and cost-cutting decisions. Businesses can establish pricing that covers their costs and make a profit if they know their break-even point. They can also find cost-cutting opportunities to lower their break-even point and boost their profitability.

Example of BEP

Here's the standard formula for BEP "Fixed costs / (Sales price per unit - Variable costs per unit)."

Let's look at an example to see how the computation works. Assume a corporation has $50,000 in fixed expenditures and $20 in variable costs per unit and sells its product for $100 per unit. We may compute the break-even point using the formula above:

Break-even point = $50,000 / ($100 - $20) = 625 units

In Sentences

  • BEP calculation assists the business in determining the required sales volume to cover the cost.
  • Understanding the break-even point is vital when making critical business decisions, such as pricing strategies.
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