breakevenpoint

The break-even point is the level of sales at which total revenue equals total costs, resulting in zero profit. It is a central concept in cost-volume-profit analysis used to assess profitability and risk.

It can be expressed in units and in sales dollars. In units: BEP in units = fixed costs / (selling price per unit − variable cost per unit). In dollars: BEP in dollars = fixed costs / contribution margin ratio, where contribution margin ratio = (selling price per unit − variable cost per unit) / selling price per unit. For a mix of products, a weighted average contribution margin is used.

Key elements are fixed costs, which do not change with output in the relevant range; variable costs, which rise with volume; the selling price per unit; and the variable cost per unit. The difference between selling price and variable cost per unit is the contribution margin that covers fixed costs and contributes to profit.

Managers use break-even analysis to estimate required sales to reach profitability, to test pricing or cost structures, and to evaluate process changes. The concept also supports planning margins of safety and is often depicted in a cost-volume-profit chart.

Limitations include the assumption of linear cost and revenue relationships within a relevant range, constant selling prices, and stable product mix. Real-world decisions may involve step costs, capacity limits, multiple periods, and non-financial factors that complicate the simple break-even model.