Breakeven Point
The breakeven point (breakeven price) for a trade or investment is determined by comparing the market price of an asset to the original cost; the breakeven point is reached when the two prices are equal.In corporate accounting, the breakeven point (BEP) formula is determined by dividing the total fixed costs associated with production by the revenue per individual unit minus the variable costs per unit. In this case, fixed costs refer to those that do not change depending upon the number of units sold. Put differently, the breakeven point is the production level at which total revenues for a product equal total expenses.
Definition: The break-even point (BEP) is the point at which the market price of an asset equals its original cost. In business accounting, the break-even point is calculated by dividing the total fixed costs by the revenue per unit minus the variable cost per unit. Fixed costs are those that do not change with the number of units sold. In other words, the break-even point is the production level at which total expenses equal total revenue.
Origin: The concept of the break-even point originated in the early 20th century within cost accounting theory. As industrialization progressed, businesses needed a method to determine the production level at which they could achieve financial balance. By the 1920s, break-even analysis had become an essential tool in corporate financial management.
Categories and Characteristics: The break-even point can be divided into two categories: financial break-even point and operational break-even point.
- Financial Break-Even Point: Focuses on the overall financial status of the business, considering all fixed and variable costs.
- Operational Break-Even Point: Primarily focuses on production and operational costs, usually excluding financial expenses and taxes.
- Helps businesses determine the minimum sales volume or revenue level.
- Provides decision support, aiding in the evaluation of the feasibility of new projects or products.
- Aids in risk management, allowing businesses to better cope with market fluctuations by understanding the break-even point.
Specific Cases:
- Case 1: A company that manufactures smartphones has fixed costs of 100,000 yuan, a selling price of 500 yuan per phone, and a variable cost of 300 yuan per phone. The break-even point is calculated as follows:
Break-Even Point (units) = Fixed Costs / (Revenue per Unit - Variable Cost per Unit)
Break-Even Point (units) = 100,000 / (500 - 300) = 500 phones.
This means the company needs to sell at least 500 phones to reach the break-even point. - Case 2: A restaurant has fixed costs of 50,000 yuan, an average selling price of 50 yuan per dish, and a variable cost of 20 yuan per dish. The break-even point is calculated as follows:
Break-Even Point (units) = 50,000 / (50 - 20) = 1,667 dishes.
This means the restaurant needs to sell at least 1,667 dishes to reach the break-even point.
Common Questions:
- Q: Does the break-even point consider taxes and interest?
A: Typically, basic break-even point calculations do not include taxes and interest, but these factors may be considered in financial break-even analysis. - Q: Is the break-even point applicable to all types of businesses?
A: Yes, break-even point analysis is applicable to various types of businesses, whether in manufacturing, services, or retail.
