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  Break Even Point

Introduction to Break Even Point

The idea of 'Break Even Point' is very important for decision making in several areas. This idea is based on the behaviour of costs that is fixed cost and variable costs. As described before, fixed costs are those costs that stay constant irrespective of the alteration in the volume of production. Alternatively, variable costs are the costs that change with the level of production. When fixed cost per unit is all the time variable, variable cost per units is all the time fixed. Further than this, these two types of costs, there are semi variable costs that are partly fixed and partially variable. So the semi variable costs comprise the features of both types of costs. They stay fixed up to a specific level of production and after crossing that level, they become variable.

The Break Even Point is a level of production in which the total costs are equivalent to the total revenue that is sales. So at the breakeven level, there is neither profit nor loss. Production level above the break-even-point will result into profit when production level below the break-even point will result in loss.

Assumptions of Break Even Point:

The idea of breakeven point is based on the following assumptions.

1. Production and sales are similar that means as much as is produced is sold out in the market. So there is no inventory remaining at the end.

2. Fixed cost stay unchanged irrespective of the production volume.

3. Variable cost changes with the production. It changes in similar proportion that of the production. Therefore it has a linear relationship with the production. In other words, variable cost per unit remains similar.

4. Selling price per unit remains unchanged irrespective of the quantity sold.

Margin of Safety:

Margin of Safety is the variation among the actual sales and the break even sales. Like we have explained at the breakeven point there is neither any profit nor loss. Therefore any firm will all the time be interested in being as much above the breakeven level as feasible. Margin of safety describes exactly this thing and the higher the safety margin the better it is. Margin of safety is calculated as follows.

Margin of Safety = Actual Sales - Break Even Sales.

Limitations of Breakeven Point:

Break Even point is very useful in decision- making considering the production level. It denotes the level of production in which there is neither any profit nor loss. Though, this is based on the assumption that the variable cost per unit, sales price per unit and the fixed cost remains unchanged. The breakeven point will give misleading results, if there is any change in these variables.

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