Break Even Point

Posted in Finance, Accounting and Economics Terms, Total Reads: 21633
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Definition: Break Even Point

Break Even Point is the point where the profit from the transaction is zero and the total sales is equal to total costs.


Formula:

BEP = Fixed Costs/(Selling Price – Variable Costs)


Fixed Costs

These are the costs that do not change with the quantity produced and remains constant. Examples can be the rent, property tax, insurance, etc.

Variable Costs

These costs depend on the quantity produced and vary with the production levels. They increase with the increase in production volumes.Examples are labor cost, material cost, etc.

Total Cost = Fixed Cost + Variable Cost


Break Even Chart

It is a graphical representation of costs at different levels as shown below-

Break Even Point Chart

P represents the breakeven point where the income is equal to the total costs and the profit is zero.


Advantages of Break Even Analysis

  1. It can be interpolated to find the changes in profit levels and break even points upon changes in fixed costs, variable costs and commodity prices.
  2. It is useful in capital budgeting techniques.
  3. It represents the minimum amount of sales necessary to prevent losses.

Limitations of Break Even Analysis

The classification of costs into fixed and variable is not very clear. And it is suited only to the analysis of one product at a time.


Hence, this concludes the definition of Break Even Point along with its overview.

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