Break Even Point:
The point where Total Revenue becomes equal to Total Cost. So at that point there is neither profit nor loss.
Methods of BEP (Break Even Point) Analysis:
(i) Graphical Method.
(ii) Equation Method.
(iii) Formula Method.
The equation and formula method are more accurate. Using equation and formula methods we can get a good graphical representation. Hand plotting graphical method won’t be that accurate.
Below are equation and formula method calculation formula. We can use any one of these methods to get same result.
|Point||Equation Method||Formula Method|
|Contribution Margin (CM)|
A coffee shop owner sales per cup of coffee with a selling price of $10 and whose variable expense is $5. The owner’s monthly fixed cost is $500. Find the Break even point.
It can be solved in many ways. We can directly plot the graph or use equation method to get the equation and then plot the graph. BEP can be found using formulas above.
To draw the graph we know that,
Also at BEP,
Let, x be the number of coffee’s sold. Then,
Revenue for 1 cup $10. Revenue for x cup $10x.
variable cost for 1 cup $5. variable cost for x cup $5x.
Total Revenue - Total Cost = 0 => Total Revenue - (Fixed Cost + variable cost) = 0 => 10x - (500 + 5x) = 0 => 5x = 500 => x = 100 units
To draw the graph we know, fixed cost is stationary so,
f(x) = 500
g(x) = fixed cost + variable cost for x cups = f(x) + 5x = 500 + 5x
h(x) = selling cost for x cups = 10x
Graphing these function, The point where total revenue and total cost touch is the Break even point.
So after selling more than 100 cups at $10 per cup the owner can expect profit.
ABC company distributes a single product with selling price $16 and whose variable expense is per unit $11. The company’s fixed expense is $16000 monthly.
(i) Prepare profit graph for company up to sales level of $ 4000 units.
(ii) Estimate company’s BEP in unit sales using the profit graph.
In 4000 units,
Total revenue = 16 * 4000 = 64000
Total Cost = fixed cost + variable cost = 16000 + 11 * 4000 = 60000
Profit = T.R - T.C = 64000 - 60000 = 4000
In 4000 units BEP,