In economics & business, specifically cost accounting, the break-even point (BEP) is the point at which cost or expenses

and revenue are equal: there is no net loss or gain, and one has "broken even". A profit or a loss has not been made, although opportunity costs have been paid, and capital has received the risk-adjusted, expected return.[1] For example, if a business sells fewer than 200 tables each month, it will make a loss, if it sells more, it will be a profit. With this information, the business managers will then need to see if they expect to be able to make and sell 200 tables per month. If they think they cannot sell that many, to ensure viability they could: 1. Try to reduce the fixed costs (by renegotiating rent for example, or keeping better control of telephone bills or other costs) 2. Try to reduce variable costs (the price it pays for the tables by finding a new supplier) 3. Increase the selling price of their tables. Any of these would reduce the break even point. In other words, the business would not need to sell so many tables to make sure it could pay its fixed costs. Computation In the linear Cost-Volume-Profit Analysis model,the break-even point (in terms of Unit Sales (X)) can be directly computed in terms of Total Revenue (TR) and Total Costs (TC) as:

where:    TFC is Total Fixed Costs. Fixed costs + Variable Costs or Q * P(Price per unit) = TFC + Q * VC(Price per unit). Q * (P . C is cost incurred i. Break Even Analysis Q = TFC/c/s ratio=Break Even ®® .VC) = TFC. The quantity is of interest in its own right. and is called the Unit Contribution Margin (C): it is the marginal profit per unit. Q * P . The Break-Even Point can alternatively be computed as the point where Contribution equalsFixed Costs. Where R is revenue generated. Thus the break-even point can be more simply computed as the point where Total Contribution = Total Fixed Cost: In currency units (sales proceeds) to reach break-even. or alternatively the portion of each sale that contributes to Fixed Costs. one can use the above calculation and multiply by Price.Q * VC = TFC.e. and V is Unit Variable Cost. P is Unit Sale Price. or. or equivalently use the Contribution Margin Ratio (Unit Contribution Margin over Price) to compute it as: R=C.

3 .breakeven output) margin of safety% = (current output .breakeven output)/current output x 100 When dealing with budgets you would instead replace "Current output" with "Budgeted output". you will obtain a number of break even points. in the example above. SP is Selling Price and VC is Variable Cost Break Even Analysis By inserting different prices into the formula.6))= 589 units to break even.[3] margin of safety = (current output . .Margin of Safety Margin of safety represents the strength of the business. rather than 715. from $2 to $2.30. If P/V ratio is given then profit/ PV ratio == In unit Break Even = FC / (SP í VC) where FC is Fixed Cost. then it would have to sell only (1000/(2.0. It enables a business to know what is the exact amount it has gained or lost and whether they are over or below the break even point. one for each possible price charged. If the firm changes the selling price for its product.

The data used in these formulae come either from accounting records or from various estimation techniques such as regression analysis. they can be graphed. This is very important for financial analysis. The break even points (A. you draw the total cost curve (TC in the diagram) which shows the total cost associated with each possible level of output. or R3). The break even quantity at each selling price can be read off the horizontal axis and the break even price at each selling price can be read off the vertical axis.B. R2. is expressing breakeven sales as a percentage of actual sales²can give managers a chance to understand when to expect to break even (by linking the percent to when in the week/month this percent of sales might occur). for example. A better understanding of break-even. and R3) which show the total amount of revenue received at each output level. The break-even point is a special case of Target Income Sales. and fixed cost curves can each be constructed with simple formulae. It helps to provide a dynamic view of the relationships between sales. the fixed cost curve (FC) which shows the costs that do not vary with output level. given the price you will be charging. For example. total revenue. . costs and profits.To make the results clearer. Application The break-even point is one of the simplest yet least used analytical tools in management.C) are the points of intersection between the total cost curve (TC) and a total revenue curve (R1. where Target Income is 0 (breaking even). the total revenue curve is simply the product of selling price times quantity for each output quantity. and finally the various total revenue lines (R1. To do this. R2. The total cost.

the sales mix is constant). introduction to break-even analysis Introduction Break-even analysis is a technique widely used by production management and management accountants.Limitations      Break-even analysis is only a supply side (i. It assumes average variable costs are constant per unit of output.. linearity) It assumes that the quantity of goods produced is equal to the quantity of goods sold (i.e.. at least in the range of likely quantities of sales. (i. this is true in the short run. an increase in the scale of production is likely to cause fixed costs to rise. there is no change in the quantity of goods held in inventory at the beginning of the period and the quantity of goods held in inventory at the end of the period). It assumes that fixed costs (FC) are constant.e. as it tells you nothing about what sales are actually likely to be for the product at these various prices. In multi-product companies. it assumes that the relative proportions of each product sold and produced are constant (i.e. costs only) analysis. It is based on categorising production costs between those which are "variable" (costs that change when the production output changes) and those that are "fixed" (costs not directly related to the volume of production). Although.e. .

In the long term fixed costs can alter . the line OA represents the variation of income at varying levels of production activity ("output"). The Break-Even Chart In its simplest form.Administration costs Variable Costs . revenue) with the same variation in activity. OB represents the total fixed costs in the business. As output increases.revenue related) . and hence neither profit nor loss is made.Depreciation . adding a new factory unit) or through the growth in overheads required to support a larger. Fixed Costs Fixed costs are those business costs that are not directly related to the level of production or output.g. more complex business.Research and development . The point at which neither profit nor loss is made is known as the "break-even point" and is represented on the chart below by the intersection of the two lines: In the diagram above. In other words. sales value or production at which the business makes neither a profit nor a loss (the "break-even point"). At the point of intersection. P.Total variable and fixed costs are compared with sales revenue in order to determine the level of sales volume. Examples of fixed costs: . even if the business has a zero output or high output. the break-even chart is a graphical representation of costs at various levels of activity shown on the same chart as the variation of income (or sales. the level of fixed costs will remain broadly the same. variable costs are incurred. meaning that total costs (fixed + variable) also increase.Rent and rates .Marketing costs (non. Costs are greater than Income. At low levels of output.perhaps as a result of investment in production capacity (e. costs are exactly equal to income.

How to Do a Breakeven Analysis Breakeven analysis helps determine when your business revenues equal your costs From Daniel Richards. it may not require costs associated with functions such as human resource management or a fully-resourced finance department. in reality there are some costs which are fixed in nature but which increase when output reaches certain levels. fuel and revenue-related costs such as commission.g. These include depreciation (where it is calculated related to output . See More About: .Variable costs are those costs which vary directly with the level of output. number and complexity of transactions) then more resources are required. as the scale of the business grows (e. However. Raw materials and the wages those working on the production line are good examples.e. They represent payment output-related inputs such as raw materials. If production rises suddenly then some short-term increase in warehousing and/or transport may be required. output. In these circumstances. number people employed. machine hours). Indirect variable costs cannot be directly attributable to production but they do vary with output. A distinction is often made between "Direct" variable costs and "Indirect" variable costs. These are largely related to the overall "scale" and/or complexity of the business. maintenance and certain labour costs. direct labour. we say that part of the cost is variable and part fixed. Direct variable costs are those which can be directly attributable to the production of a particular product or service and allocated to a particular cost centre.g. For example. when a business has relatively low levels of output or sales. Semi-Variable Costs Whilst the distinction between fixed and variable costs is a convenient way of categorising business costs.

This approach is frowned upon since it allows competitors who can make the product for less than you to easily undercut you on price. conducting a breakeven analysis is a matter of simple math. To conduct your breakeven analysis. because the breakeven point is the lower limit of profit when determining margins. referred to by David G. take your fixed costs. Another method. you can lower your price and still turn a profit. Fixed costs: These are costs that are the same regardless of how many items you sell.000 Back. This calculation is critical for any business owner. There are always different pricing methods that can be Make Money OnlineA Free. but if you're entering a competitive industry. y Pricing Methods: There are several different schools of thought on how to treat price when conducting a breakeven analysis. At the breakeven point. Bakken of Harris Interactive as "price-based costing"encourages business owners to "start with the price that consumers are willing to pay (when they have competitive alternatives) and whittle down costs to meet that price. are considered fixed costs since you have to make these outlays before you sell your first item. For example. track progress & create reports." That way if you encounter new competition. Try It Now!www. Defining Costs There are several types of costs to consider when conducting a breakeven analysis.perfios. you should be able to charge a premium price. As an equation. which calls for figuring out how much it will cost to produce one unit of an item and setting the price to that amount plus a predetermined profit margin. Psychology of Pricing: Pricing can involve a complicated decision-making process on the part of the consumer. nor have any losses been incurred. A company has broken even when its total sales or revenues equal its total expenses. if you were operating a greeting card store where you had to buy greeting cards from a stationary company for $1 each. no profit has been made.y y y y breakeven analysis startup costs business planning financial analysis Sponsored Links Social Media SoftwareCompose messages. find customers. As your business and sales Starting a Business?Top Class Business Laptop w/ Intel® CoreŒ From DellŒ. divided by your price. such as rent. If you've created a brand new. One common strategy is "cost-based pricing". y Variable costs: These are recurring costs that you absorb with each unit you sell. you'll have to keep the price in line with the going rate or perhaps even offer a discount to get customers to switch to your EMI CalculatorsCompare Top Banks for Great Deals Plus Get Rs 10. so here's a refresher on the most relevant. Order Now!www. unique product. this is defined as: y . Unit price refers to the amount you plan to charge customers to buy a single unit of your product. you can begin appropriating labor and other items as variable costs if it makes sense for your Entrepreneurs Ads y y y y y Entrepreneurs Formula BMI Calculation Formula Calculate Flow Calculation Sponsored Links Top Small Business IdeasAttend Small Business Conference on Small Business Congress. It is a mix of quantitative and qualitative factors. insurance and computers. The formula: Don't worry. Sep 3 & 4www. it's fairly simple. Setting a Price y This is critical to your breakeven analysis. Take the time to review articles on pricing strategyand the psychology of pricing before choosing how to price your product or If you can accurately forecast your costs and sales. All start-up costs.sproutsocial. you can't calculate likely revenues if you don't know what the unit price will be.Dell. and there is plenty of research on the marketing and psychology of how consumers perceive price. Safe & Simplified Tool for Managing Your Money.franchiseindia. Apply Now!BankBazaar. then that dollar represents a variable cost. minus your variable costs.

patience and personal expectations). As an equation. you've recovered all costs associated with producing your product (both variable and fixed). Limitations y It is important to understand what the results of your breakeven analysis are telling you. y Inc. Lastly. if you wanted to give yourself a goal of a certain offers a breakeven analysis calculator that requires a user to enter in total annual overhead and annual year-to-date sales and cost of sales. the calculation reports that you would break even when you sold your 500th unit. You could use a program such as Excel's Goal Seek. this is defined as: Unit Contribution Margin = Sales Price . Above the breakeven point.and identify areas where you might be able to make cuts. try lowering your price and calculating and analyzing the new breakeven point. every additional unit sold increases profit by the amount of the unit contribution margin. for example. Once you've reached that point. say $1 million. take a look at your costs .Variable Costs) This calculation will let you know how many units of a product you'll need to sell to break even. . and then work backwards to see how many units you would need to sell to hit that number. and lets the user delineate the period for the YTD calculations in terms of weeks. Alternatively.) Calculators There are several online calculators to assist you with your breakeven analysis: Case Western Reserve University offers a breakeven analysis calculator that includes a review of relevant microeconomic terms. (This online tutorial will show you how to use Goal Seek. If. y This financial calculator allows you to chart your costs and profits appear in a graph. which is defined as the amount each unit contributes to covering fixed costs and increasing profits.both fixed and variable . If you think 500 units is possible but would take a while. then this may not be the right business for you to go into. so if you go into market with the wrong product or the wrong price. as well as play with different price options and easily calculate the resulting breakeven point.Variable Costs Recording this information in a spreadsheet will allow you to easily make adjustments as costs change over time. it may be tough to ever hit the breakeven point. decide whether this seems feasible. If you don't think you can sell 500 units within a reasonable period of time (dictated by your financial situation.Breakeven Point = Fixed Costs/(Unit Selling Price . understand that breakeven analysis is not a predictor of demand.

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