Break-even analysis

The essentials

The break-even point (BEP) is the level of sales at which total revenue equals total cost, so there is neither profit nor loss. Sales above the BEP give profit; sales below it give loss. Break-even analysis helps an entrepreneur decide prices, plan the minimum sales target and judge risk.

• Contribution per unit = selling price per unit − variable cost per unit. It is the amount each unit contributes first towards fixed costs and then towards profit.
• BEP (in units) = fixed costs ÷ contribution per unit.
• P/V ratio (profit-volume ratio) = contribution ÷ sales × 100.
• BEP (in rupees) = fixed costs ÷ P/V ratio.
• Margin of safety = actual sales − break-even sales; it shows how much sales can fall before a loss occurs.

Key points

• Multiple products: when products are sold in a fixed sales mix, calculate a weighted average contribution per unit using the mix ratio. BEP (total units) = fixed costs ÷ weighted average contribution; then divide the total in the mix ratio.
• Example: products A and B sold in ratio 3 : 2 with contributions ₹10 and ₹20 give a weighted contribution of (3 × 10 + 2 × 20) ÷ 5 = ₹14.
• Assumptions: selling price and variable cost per unit stay constant; fixed costs stay fixed within the relevant range.

Exam tips

• Use contribution, not selling price, in the denominator.
• If a question gives P/V ratio, use the rupee formula directly.

Common mistakes

• Dividing fixed costs by selling price.
• Forgetting to split the multiple-product BEP back into individual products.