Break even point is a neutral point at which the company neither makes a profit nor suffers a loss. Calculating the breakeven point is a powerful quantitative tool for managers. In its simplest form, break even analysis provides insight into whether or not revenue from a product or service has the ability to cover the relevant costs of production of that product or service. Entrepreneurs can use this information in making a wide range of business decisions, including setting prices, preparing competitive bids, and applying for loans. It also helps in profit planning and goal setting. At the break even level,
Total Revenue = Total Expenses The formula for calculating break even level is Break Even Volume=Fixed cost/ margin Margin Per Unit = Unit Price ( Selling price) – Marginal Cost (Variable cost) Contribution per unit = Selling price per unit – Variable cost per unit Or Contribution Ratio = Selling price – Marginal cost Marginal Cost = Total variable cost Or = Total cost — Fixed cost Or = Direct material+Direct labour + Direct expenses + Variable overhead
The ‘Break-even Point’ is that volume of sales at which total revenue is equal to total costs, with zero profit. ‘Break-even point’ is a situation where the firm is neither in profit nor loss. In other words, this is a ‘no-profit, no-loss situation’. When the organisation is not able to earn profits, the best alternative for the firm is, at least, not to incur loss. So, organisation would like to know at what level of production and sales, the organisation would be able to achieve noloss, no-profit situation. This is the greatest contribution of ‘Break-even Point’.
