Break Even Point is the point where the profit from the transaction is zero and the total sales is equal to total costs.
BEP = Fixed Costs/(Selling Price – Variable 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.
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-
P represents the breakeven point where the income is equal to the total costs and the profit is zero.
Advantages of Break Even Analysis
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.