Introduction of the term Break Even Point

Question

Give a brief introduction of the term Break Even Point. How does BEP aid in making business decision?

Answer 1

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

Therefore, we can say that Contribution = Fixed Cost

Any contribution generated after BEP will straight result in profits as the fixed costs are completely covered now. BEP can be evaluated in two ways:

In phrases of Quantity-

Fixed Costs / Contribution per unit

In phrases of Amount-

(Fixed Costs) / (P/V Ratio)