Break Even Point is a marvelous calculator to calculate an important reference point that enters into planning and carrying out business activities. By clearly understanding the level of sales needed to cover all costs, you know how many units you must produce, in the case of a manufacturing business, or how many units you need to purchase and sell, in the case of a merchandising business. In a services business, the break-even point indicates the number of billable hours you must work in order to cover your costs.
Break-Even Point (BEP) is the point of zero loss or profit. At break-even point, the revenues of the business are equal its total costs and its contribution margin equals its total fixed costs. Break-even point can be calculated by equation method as followed:
P * X = V * X + FC + Profit
Where,
P is the price per unit,
X is the number of units,
V is variable cost per unit and
FC is total fixed cost.
The calculation of the breakeven point represents an important aspect in determining the mix of products and services a business offers. Based solely on the margin that each product or service contributes, you could decide to concentrate more resources on the more profitable products or services, and even discontinue those that do not reach the breakeven point. But it is also important to consider the break-even point within the context of the business strategy. There could be products or services that contribute little or nothing to the gross margin, but that are essential in order to offer the overall level of quality and service that the business wants to provide its customers.
