Break Even Point Definition – Formula,Example and Importance

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Break Even Point Definition with Example

Break Even Point Definition – The volume at which the total contribution from a product line equals total fixed costs. To calculate it, subtract the variable cost per unit from selling price to determine the unit contribution; then divide total fixed costs by the unit contribution. Break-even on an investment is the point when the net cash received from the investment equals its cost.

In short and simple word, Break-even is a point where there is no profit and no loss. The cost incurred becomes equals to the revenues earned. At this point neither the business losses nor it gains. It’s a neutral situation for the business.

Formula

Break even point = Fixed Costs/ Contribution Margin Per unit

Or

= Fixed Cost/ (Sales per unit – Variable Cost per unit)

Break even point in Rupees  = Sales Price per unit × Break even point in units

Break – Even Point Example

There are various ways to calculate the break even point. In order to get the deep understanding of Break Even point, let’s discuss an example.

XYZ firm’s financial statement shows the following:

Variable cost per unit = Rs.20
Sales price per unit = Rs. 50
Profits = Rs. 10,000
Fixed Costs = 60,000

Break-even point = 60,000 /( 50-20)

=60,000/30

=20,000 units

Related Financial Terms of Breakeven

Importance of Break-even – Why Break-even is Used?

The concept of break-even point has universal acceptance. No matter whether the firm is small or large, each business has to go through this point or experience this situation. This is important as company comes to know about how much it should produce in order to earn profit. In addition to this, it also assess the true cost that is involve in producing goods and services. Understanding the break-even point also helps in understanding the concepts like direct and indirect costs.

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