Break Even Point in detail

The break-even point can be defined as a point where total costs (expenses) and total sales (revenue) are equal. In other words, it can be described as a point where there is no net profit or loss. It serves as an important tool for long term planning for any business.

Break even point helps in decision making in areas such as deciding prices, setting sales budgets, and preparing business and operations plans.

DETERMINATION OF BREAK EVEN POINT

In accounting, the breakeven point formula is determined by dividing the total fixed costs associated with production by the revenue per individual unit minus the variable costs per unit.

Fixed costs are expenses that remain the same, regardless of how many sales are made. On the other hand, variable costs change based on the sales activity. With an increase in sales, the variable costs also increase . Examples of variable costs include direct materials and direct labor.

FORMULA :- The following formula is used to calculate the Break even point –

Break-even Point Per Unit = Fixed Costs / (Sales Price Per Unit – Variable Costs Per Unit)

It must be remembered that  fixed costs are the overall costs, and the sales price and variable costs are just per unit.

IMPORTANCE OF BREAK EVEN ANALYSIS

Break-even point is a key financial analysis tool that is commonly used by many business owners. It is useful for the following reasons

  • It helps to determine the impact on profit on changing to automation from manual (a fixed cost replaces a variable cost).
  • It helps to determine the amount of losses that could be sustained if there is a sales downturn.
  • With break-even charts, managers can determine the impact of changing selling prices on sales volume and profitability.
  • The break even point analysis motivates the sales staff as it helps the sales employees to see the results of extra sales on profits and the potential for more commissions.

 

Thus, in simple words Break-even point implies the level of business at which the firm’s total income equals total expenditure and helps in determining the profit planning of the business.

Accounting & Finance for Banking

Principles & Practices of Banking Module E Pdf

Free
Module E PPB ePDFs available in our android app. Get them all at https://iibf.info/app

Accounting and Finance for Banking Module A Pdf

Free
Accounting and finance for bankers all ePDFs are available in our an app. Get them all at https://iibf.info/app

Accounting and Finance for Banking Module A Pdf

Free
Accounting and finance for bankers all ePDFs are available in our an app. Get them all at https://iibf.info/app

Leave a reply

Please enter your comment!
Please enter your name here

Popular

Free Live Classes

spot_img

More from author

All about KYC/AML Exam by IIBF

All about KYC/AML Exam by IIBF The KYC/AML is a professional certification exam in Anti Money Laundering and Know your customer conducted by the Indian...

CCP- Certified Credit Professional Course by IIBF

IIBF CCP (Certified Credit Professional) exam is an All-India Exam directed by the Indian Institute of Banking and Finance (IIBF) to select competent candidates...

What is Digital Banking in Detail

Digital Banking is the automation of traditional banking services. It is defined as banking done through the digital platform, doing away with all the...

Digital Banking Course By IIBF

Digital Banking Course By IIBF Certificate course in Digital Banking is conducted by IIBF to provide practicing bankers a sound foundation in the digital banking...