What is a Break Even Point?
Breakeven point can be defined as the business volume that balances the total costs with total gains. The basic idea for calculating breakeven point is to calculate the point at which revenues begin to exceed costs.
For businesses it is important to determine whether or not your business is making profit. When a business reaches the break even point (also known as the point of break even) it can be assumed that business is no longer operating at a loss nor it is operating at a profit either. In other words, it is not losing money nor generating any revenue.
The break-even analysis is very important or has utmost relevance especially for small businesses and start-ups. The simple formulae for calculating the breakeven point for your business is-
Breakeven point or BEP = Fixed Cost / (unit selling price – variable costs)
Fixed Cost
These costs are expenses that remain fixed or constant regardless of how much revenue is generated from monthly sales. Examples of fixed costs include rent, salaries, insurance and other office and administrative expenses.
Unit Selling Price
This is the price at which the product or service is being sold in the market.
Variable Costs
These costs vary or change in direct proportion to the quantity sold or unit volume delivered. Variable costs include line items such as materials, supplies, labor, shipping expenses.
Variable costs are also known as cost of goods sold or cost of sales and are best represented as percentage of sales. For example: the cost of material or labor may be 50% of the sales price.
Mixed or Semi-Variable Cost
These costs are partly fixed and partly variable. For instance some of the wages paid may be administrative (fixed) while other wages (variable) may be related to the products made or services performed.
Breakeven point calculation helps companies to make short-term decisions in terms of knowing the impact that rising or dropping sales prices will have any impact on breakeven point.
Breakeven point can also be used to examine the impact of
