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Break-Even Analysis

Break-even point (BEP) is most commonly used in cost accounting and is the point where total cost are equal to total revenue. At this point, there are no profits or losses and capital has received the expected return that has been adjusted for potential risk. It is based on categorizing production costs between variable costs and fixed costs. Fixed costs are business costs that are not determined by the level of production. Examples of fixed costs are marketing costs and rent. Variable costs are costs that are dependent on level of output. Variable costs include raw materials, labour and fuel.

One use of breakeven analysis includes using it as a margin of safety, which is how much a firm can afford a decline in sales before losses occur¹. Margin of safety is planned sales minus the breakeven point. The margin of safety reflects resistance capacity to avoid losses¹. Total variable and fixed costs are compared with total sales revenue to find the level of sales volume, value, or product for when a profit or loss is made. 

The break even point can be calculated by equating total revenue with total cost. A high break-even point shows the vulnerability of the firm’s profit position. When the contribution is high, the business has a high endurance level.

 

Reference:

1. Break-even Point. Retrieved from www.readyratios.com/reference/analysis/break_even_point.html

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