It is an analysis done to determine the point at which revenue received equals the costs associated with receiving the revenue. Break Even Analysis calculates what is known as a margin of safety, the amount that revenues exceed the break-even point.
Break Even Analysis is a supply side analysis: that is, it only analyzes the costs of the sales and it does not analyze how demand may be affected at different price levels. The Break Even Level or Break Even Point (BEP) represents the sales amount either in unit or in revenue terms that is required to cover total costs (both fixed and variable). Total profit at the BEP is ZERO.
Break Even is only possible if a firm’s prices are higher than its variable costs per unit and if so, then each unit of the product sold will generate some “contribution” toward covering fixed costs
Break Even Point is calculated using the below formula.
Note that we can express the Break Even Point in terms of BREAK EVEN SALES UNITS (BESU) and BREAK EVEN SALES AMOUNT (BESA). The above formula is used to calculate BESU. BESA is calculated using the below formula.
BESA = BESU × Sales Price
Let us see how to calculate the Break Even Point Using MS Excel (R).
A company is manufacturing a certain type of tiles for buildings. It is selling each piece of tile at Rs. 25. The Total Fixed Cost, Total Variable Cost and Total Sales the company makes at different levels of selling the bitumen barrel is below.
|No. of Tiles Sold||Total Fixed Cost in Rs.||Total Variable Cost in Rs.||Total Sales in Rs.|
Calculate the Break Even Sales Unit and Break Even Sales Amount after plotting the graph.
Before Plotting the graph, we have to calculate the Total Cost. The breakeven point is shown in the graph below.