Break Even Point

By Abdulla Israr & Simran Rani

 BREAK EVEN POINT



Description also available in video format (attached below).


Definition:-

1) It can be easily defined as the point where total revenue becomes equal to the total cost.

2) It can also be defined as the point at which there is no loss and no gain.


Formula:- 

  • It can be calculated by using the formula:-
Breakeven Point = Fixed Costs ÷ (Price - Variable Costs) 

Here,
  • Fixed Cost= Costs that are not dependent on sales volume, such as rent
  • Variable Cost= Costs that are dependent on sales volume, such as the cost of manufacturing
  • Price= Selling price of the product
           
Example to understand the Breakeven Point:-

  • Suppose you manufactured a bunch of 7pens which covers up in a total cost of 20 rupees. 
  • Now you enters into the market to sell your pens on a selling price of 10Rs per unit(Pen)
  • After few hours you sell out your two unit which means your total earnings are 20Rs.
  • At this point your total cost becomes equal to your total revenue and this point is known as the "Break Even Point".

Example to Calculate the Breakeven Point:-

Indian Corporation has calculated that it has fixed costs that consist of its lease, depreciation of its assets, executive salaries, and property taxes. Those fixed costs add up to 60,000Rs Their product is the widget. Their variable costs associated with producing the widget are raw material, factory labor, and sales commissions. Variable costs have been calculated to be 0.80Rs per unit. The widget is priced at 2Rs each.

By the help of given information, we can calculate the breakeven point for Indian Corporation's product, the widget, using our formula above:

60,000 ÷ (2 - 0.80) = 50,000 units

What this answer means is that Indian Corporation has to produce and sell 50,000 units widgets to cover their total expenses, fixed and variable. At this level of sales, they will make no profit but will just break even.

Video description

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