break even point in accounting and finance
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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