1. Break Even Point is the point at which total revenue equals to total cost.2. Finance: point at which revenues equal costs. The point is located by break-even analysis, which determines the volume of sales at which fixed and variable costs will be covered. All sales over the break-even point produce profits; any drop in sales below that point will produce losses.3. Real estate: Occupancy level needed to pay for operating expenses and debt service, but leaving no cash flow.4. Securities: Price at which a transaction produces neither a gain nor a loss.
BEP=TFC/P-AVCWhere,BEP=Break even PointTFC=total fixed costP= The selling PriceAVC= Average variable costP-AVC ( contribution marginPer unit)
Example 1 – How many Christmas trees need to be sold ? Wholesale price per tree is $8.00 Fixed cost is $30,000 Variable cost per tree is $5.00 Solution BEP= TFC/(P – AVC) = $30,000/($8 - $5) = $30,000/$3 = 10,000 trees
BEP=TFC/CR Where, CR(Contribution Ratio)=TR-TVC/TR TR=total revenue TVC=Total variable costBEP in sales value
Assumptions in BEP Cost function & revenue function are linear. Total cost is divided into fixed & variable cost. Selling price is constant. The volume of sales & the volume of production are identical. Average & marginal productivity of factors are constant. Product mix is stable(incase of MNC). Factor price is constant.
Economic research. Business decision making. Investment analysis. Public policies. Pricing. Capital budgeting. Sales projection.
Static. Unrealistic. Shortcomings. Limit to short run. Ignore market factors. Not a perfect substitute.Limitation of BEP