Break Even Point

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.

5. BEP=TFC/P-AVC
Where,
BEP=Break even Point
TFC=total fixed cost
P= The selling Price
AVC= Average variable cost
P-AVC ( contribution margin
Per unit)

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