Break-even point can be defined as the level of production where the total revenues and total expenses of a business are equal. At the BEP, the revenue of the company which is earned by the sale of products it manufactured is equal to the total costs of manufacturing the product.
In accounting, at Break Even point, the total profit of the company is zero because their total revenue and total expenditure in producing the product is at par. In other words, it is a situation where there is no profit, no loss to the company.
Let us take an example for BEP, if the total revenues of TRENDING ACCOUNTING Ltd. is $7,000 and total expenses also equal to $7,000, it means that TRENDING ACCOUNTING Ltd. is working at the Break Even Point.
FORMULA FOR CALCULATING BREAK-EVEN POINT
The formula to calculate the break-even point of a business in terms of the number of units is stated below:
Break-Even Point in Units = Fixed Cost ÷ Sales Price Per Unit – Variable Cost Per Unit
There is a second and more comprehensive formula for calculating the BEP in terms of a number of units. The formula is stated below:
Break-Even Point in Units = Fixed Costs ÷ Contribution Margin Per Unit.
The formula for calculating Contribution Margin Per Unit is stated below:
Contribution Margin Per Unit = Sales Price Per Unit – Variable Cost Per Unit
We are going to briefly discuss on the meaning of contribution margin. Contribution margin means revenue minus variable expenses. With contribution margin, you will be able to determine, how much of company’s revenue will be available to pay for the fixed expenses and to generate the net income.
The formula for calculating BEP in terms of money is:
Break Even Point = Break Even Point in Units x Sales Price Per Unit
From the information below, you are required to calculate the BEP in terms of dollars and sales unit:
Fixed Cost: $10,000
Price Per Unit: $20
Variable Cost Per Unit: $10
We are going to substitute the given information in the formula for calculating the Break Even Point in terms of sales units:
Break Even Point in Units = Fixed Costs ÷ Sales Price Per Unit – Variable Cost Per Unit
= $10,000 ÷ $20 – $10
= 1,000 units
Break Even Point in Terms of Money = Break Even Point in Units x Sales Price Per Unit
= 1,000 x $20
= $ 20,000
USES OF BREAK EVEN POINT
Break-even point is has the following uses in business:
1. BEP helps to determine the impact on profit if variable cost is substituted by fixed cost.
2. It helps to ascertain the effect of the change in the price of a product on the profits.
3. BEP determines the number of losses that a business could sustain if at any point the business suffers a sales downward.
4. It helps to determine the maximum profit that can be earned with remaining capacity left after reaching the BEP
The main motive of every business is to earn profits. The business will aim to break-even if it is unavailable to make profit. BEP is a point where revenues and expenses of a business are equal, and it is the next best position of a company which is not earning profits. It is the minimum point, below which the company will start incurring losses, so the management of the company strives towards working above the BEP.