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The Break Even Point is the level of activity or sales at which neither a profit nor a loss is made. At this point, sales revenue exactly equals total costs. Thus it indicates the sales volume at which operation break-even. The break even point can be expressed in terms of number of units sold or in terms of sales value.
At Breakeven Point, fixed cost equals contribution.Consequently, its necessary to earn enough contribution to cover fixed cost before any profit can be earned. Once the breakeven point is reached, all contribution will result in profit, seeing that fixed cost have already been covered. However where the contribution from sales does not reaches the level of fixed costs, a loss is incurred.
Breakeven Point (B/E) can be calculated by any of the following formula:
1) B/E(In terms of units) = Fixed Cost/Contribution per unit
2) B/E(In terms of sales value) =Fixed Cost*Sales/ Contribution
=Fixed cost/Profit volume ratio
The Breakeven point is important to the management of a firm because it indicates the lowest level to which activity can drop without putting the continued life of the firm in jeopardy. It may not be necessarily fatal for a concern to operate below breakeven point occasionally; however, in the long run it must operate above this level.
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