2. 1. Break Even Point is the point at which total revenue
equals to total cost.
2. Finance: point at which revenues equal costs. The point
is located by break-even analysis, which determines the
volume of sales at which fixed and variable costs will
be covered. All sales over the break-even point produce
profits; any drop in sales below that point will produce
losses.
3. Real estate: Occupancy level needed to pay for
operating expenses and debt service, but leaving no
cash flow.
4. Securities: Price at which a transaction produces
neither a gain nor a loss.
6. Example 1 –
How many Christmas trees need to be
sold ?
Wholesale price per tree is $8.00
Fixed cost is $30,000
Variable cost per tree is $5.00
Solution
BEP= TFC/(P – AVC) = $30,000/($8 - $5)
= $30,000/$3 = 10,000 trees
7. BEP=TFC/CR
Where,
CR(Contribution Ratio)=TR-TVC/TR
TR=total revenue
TVC=Total variable cost
BEP in sales value
8. Assumptions in BEP
Cost function & revenue function are linear.
Total cost is divided into fixed & variable cost.
Selling price is constant.
The volume of sales & the volume of production are
identical.
Average & marginal productivity of factors are
constant.
Product mix is stable(incase of MNC).
Factor price is constant.
9. Economic research.
Business decision making.
Investment analysis.
Public policies.
Pricing.
Capital budgeting.
Sales projection.
10. Static.
Unrealistic.
Shortcomings.
Limit to short run.
Ignore market factors.
Not a perfect substitute.
Limitation of BEP