break even point in accounting and finance

Break-Even Point in Accounting and FinanceExplained

What is BEP?

Point in time (or in number of units sold) when forecasted revenue exactly equals the estimated total costs; where loss ends and profit begins to accumulate. This is the point at which a business, product, or project becomes financially viable.

Revenue

Total Cost

BEP

BEP in Accounting

• Break even point is defined as the level of sales at which profit is zero. The break-even point can also be defined as the point where total sales equals total expenses or as the point where total contribution margin equals total fixed expenses.

• Contribution Margin approach can be used to calculate Accounting BEP. Contribution Margin is the excess of unit sales price over unit variable cost

Contribution Margin = Sales price – Unit Variable cost

BEP in Accounting

• BEP (in units) = Fixes Cost / Contribution Margin per

unit

• BEP (in amount) = Fixed Cost / Profit Volume Ratio• Where Profit Volume Ratio = Contribution margin per unit /

Selling price per unit

BEP in Accounting

Financial Break-Even

• Financial Break-Even Point is the level of EBIT which is equal to firm’s fixed financial costs, which includes Interest and Preference Dividend.

• The minimum level of EBIT required to pay off the commitments of interest, preference dividend and tax is Financial BEP. Anything beyond this point is profit to the shareholders.

Financial Break-Even

• The Financial BEP can be determined by

Financial BEP = I + Dp / (1-t)• Where I = Annual interest charges Dp = Preference Dividend t = Tax Rate

Accounting BEP vs Financial BEP

Accounting Financial

Caters Individual Needs

EPS

Investment Consideration

BEP in Units

BEP in Amount