Most managers would able to understand the term “break-even” which means there is no loss or gain.
Similarly, in the cost-volume-profit relationship, break even point(BEP) is the LEVEL OF SALES AT WHICH PROFIT IS ZERO. At this point , there is NO gain or loss
Refer to the below situation:
Total ($) Per unit($)
Sales ( 500 Product A) 200,000 550
Less: Variable expenses 50,000 200
Contribution margin 150,000 350
less: Fixed expenses 70,000
Net Operating Income 80,000
Salient points to note:
- Once the break even point has been reached, net operating income will increase by the unit contribution margin for each additional unit sold in this case $350
- Even if there is no sales, the company loss would equal to its fixed expense which is $70,000
- In the above case, there is ample profit, the decision maker can still price the products lower until the contribution margin= fixed expense which is the breakeven point level of sales.
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