Introduction
The break-even analysis is the study of revenues and costs of a firm in relation to its volume of sales and specially the determination of that volume at which its costs and revenues are equal to each other. The break-even point (BEP) may be defined as that level of sales of a firm at which its total revenues are equal to its total costs and hence its net income is zero.
Break-even analysis discusses about the behavior of total cost and total revenue on the increasing output. Every firm aims at attaining break even point. As the output increases the total cost and total revenue also increase. The total cost starts from a fixed cost, whereas the total revenue starts from zero. At a point the total cost and total revenue become equal. This point is known as the break even point. If competition is high the achievement of break even point becomes slower. At break even point the net profit is nil.
Determination of BEP
The BEP of a firm can be determined in two ways. They are:
In terms of physical units i.e. volume of output.
In terms of money value i.e. the value of sales.
BEP in terms of Physical Units
This method is convenient for a firm producing a single product. The BEP is the no of units of the commodity that should be sold to earn enough revenue just to cover all the expenses of production. The revenue covers all the cost – variable as well as fixed. The firm does not earn any profit nor does it incur any loss.
The BEP is illustrated in the following table:
Output in units sold TFC (Rs) TVC (Rs) TC (Rs) TR (Rs) at the rate of 150 /unit
0 1000 - 1000 -
10 1000 1000 2000 1500
20 1000 2000 3000