Break-even Point
Break-even Analysis

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Calculation of the point at which the gains equal the losses. Explanation of Break-even Point Analysis.

The Break-even Point is, in general, the point at which the gains equal the losses. A break-even point defines when an investment will generate a positive return. The point where sales or revenues equal expenses. Or also the point where total costs equal total revenues. There is no profit made or loss incurred at the break-even point. This is important for anyone that manages a business, since the break-even point is the lower limit of profit when prices are set and margins are determined.

Achieving Break-even today does not return the losses occurred in the past. Also it does not build up a reserve for future losses. And finally it does not provide a return on your investment (the reward for exposure to risk).

The Break-even method can be applied to a product, an investment, or the entire company's operations and is also used in the options world. In options, the Break-even Point is the market price that a stock must reach for option buyers to avoid a loss if they exercise. For a Call, it is the strike price plus the premium paid. For a Put, it is the strike price minus the premium paid.

The relationship between fixed costs, variable costs and returns

Break-even analysis is a useful tool to study the relationship between fixed costs, variable costs and returns. The Break-even Point defines when an investment will generate a positive return. It can be viewed graphically or with simple mathematics. Break-even analysis calculates the volume of production at a given price necessary to cover all costs. Break-even price analysis calculates the price necessary at a given level of production to cover all costs. To explain how break-even analysis works, it is necessary to define the cost items.

Fixed costs, which are incurred after the decision to enter into a business activity is made, are not directly related to the level of production. Fixed costs include, but are not limited to, depreciation on equipment, interest costs, taxes and general overhead expenses. Total fixed costs are the sum of the fixed costs.

Variable costs change in direct relation to volume of output. They may include cost of goods sold or production expenses, such as labor and electricity costs, feed, fuel, veterinary, irrigation and other expenses directly related to the production of a commodity or investment in a capital asset. Total variable costs (TVC) are the sum of the variable costs for the specified level of production or output. Average variable costs are the variable costs per unit of output or of TVC divided by units of output.

The Break-even Point analysis must not be mistaken for the Payback Period, the time it takes to recover an investment.

In Value Based Management terms, a break-even point should be defined as the Operating Profit margin level at which the business / investment is earning exactly the minimum acceptable Rate of Return, that is, its total cost of capital.

Break-even Point calculation

Calculation of the BEP can be done using the following formula:

BEP = TFC / (SUP - VCUP)

where:

BEP = break-even point (units of production)
TFC = total fixed costs,
VCUP = variable costs per unit of production,
SUP = selling price per unit of production.

Benefits of Break-even Analysis

The main advantage of break-even analysis is that it explains the relationship between cost, production volume and returns. It can be extended to show how changes in fixed cost-variable cost relationships, in commodity prices, or in revenues, will affect profit levels and break-even points. Break-even analysis is most useful when used with partial budgeting or capital budgeting techniques. The major benefit to using break-even analysis is that it indicates the lowest amount of business activity necessary to prevent losses.

Limitations of break-even analysis

It is best suited to the analysis of one product at a time;
It may be difficult to classify a cost as all variable or all fixed; and
There may be a tendency to continue to use a break-even analysis after the cost and income functions have changed.

Book: Marcell Schweitzer - Break-Even Analyses: Basic Model, Variants, Extensions -

Break-even Analysis Forum

New Topic | Help

Could There Be 2 or even more Break Even Points?
"The main article considers the simplest case, when the function TC (total cost) grows linearly (y=ax+b).
But we can image a different non-linear mathematical law describing the costs (y=ax^2+c or..."

Step-Fixed Costs in Break-even Analysis
"In analysing a break-even point, what is meant with 'step-fixed costs'?
I found that they have a distinguishing feature in that within a given time period, they are fixed within specified activit..."

Break-even Point Example
"Suppose my sales turnover for a new product line (multiple products) is $82,000 and my purchase is $75,000. My minimum margin is 20 % before tax.
However, my fixed cost are about $18,000, variabl..."

BEP Calculation Possible with Multiple Products?
"If you have multiple products with hardly any variable cost, would BEP calculation still be an option?
I have 40 lines and do not know how many products will sell. I only have a fixed expense bei..."

Breakeven Formula for Services
"What is the formula for calculating the breakeven point in a services entity?"

Usages of Break-even Analysis. Applications
"The break-even formula is both a model, and a planning tool, and an approach:
- As a model it helps managers to have an idea about the effect of changing one of its parameters at a ..."

Break Even Point Calculation of a Bank
"I would like to know that how can I calculate the break even point of my bank? What will be the formula for that & what will be the basis for taht calcualtion?
My objective is to determine the mi..."

Breakeven Point Calculation
"Suppose my fixed cost for year 2011 is $1m. If my markup is 20%, what is my breakeven point in dollar. My business is roofing contractor."

Break Even Analysis and Cost Benefit Analysis
"How we can I draw a relation between break-even analysis and cost-benefit analysis?"

Influence of Costing Method on Break Even Point?
"Why is the break even point different in variable costing and absorption costing?"

What is Shut Down Point? Definition
"What is the Shut Down Point?
What are the relationship and differences between the shut down point and the break-even point?"

Break Even Point formula for a service industry
"What will be the basis and formula to anaylse the break even point for a service industry with manpower supply"

Shut Down Break-even Point?
"Can anybody tell what is a "shut down BEP" and how it is calculated?"

Further Limitations of Break Even Analysis
"Are there any other / more disadvantages or limitations of break even analysis?"

BEP Useful for New / Start-up Businesses
"BEP is also very useful for new / start-up businesses because it allows them to gauge whether the resources and capacity they have or can acquire will meet the minimum business activity necessary for ..."

How to Calculate BEP Without Price Given?
"In BEP, if the price is not given, how am I going to calculate BEP?"

Break Even for Projects
"If in the initial years of a project it is under deficit, then what are the aspects to cover, in order to get an idea about break even point for the project? And also how to calculate the break even p..."

Measuring Improvement in Break Even Point
"If one compares the break even point over 2 different time periods for the same entity, but on different cost structures (variable and fixed), and different sales, how do you measure improvement in th..."

Time for break even..
"Generally, what is the minimum time to achieve break even for a company?"

How to Deal with Owners Withdrawals in Break-even Analysis?
"Can you tell me if owners withdrawals (drawings) are included in fixed costs in CVP and break-even analysis? Thanks!"

Contribution in Break-even Point
"What's the meaning of the phrase of "contribution " when refering to the break-even point?"

Not enough revenues...?
"What should I normally do if the revenues do not cover the fixed and variable costs? What should I do if the revenues do not even cover the fixed costs?"