Describe Break Even Point

Question

Give a brief introduction of the term ‘Break Even Point’. And as well write down is usefulness in making business decision?

Answer 1

Break Even Point (or BEP) is a quantity of sales where there is neither loss nor profit. Which means contribution is adequate to cover the fixed costs.

Therefore, we can state that Contribution is equivalent to Fixed Cost

Any contribution make subsequent to BEP will straightly result into profits as the fixed costs are completely covered now. BEP can be evaluated in two manners:

In terms of Quantity-

Fixed Costs / Contribution per unit

In terms of Amount-

(Fixed Costs) / (P/V Ratio)

BEP (or Break Even Point) is the condition where there is neither loss nor profit. At this phase, the contribution is adequate to cover the fixed costs that is, contribution is equivalent to fixed cost. Contribution make after the breakeven point will result in profits for the organization. Profit maximization is the motive of each and every organization. Therefore, every organization employ BEP as a base to receive different decisions in look upon to its sales volume and tries to raise it so that total fixed costs can be covered as early on as probable and more profits can be received.