What is a Break-Even Point?

Break Even Point (BEP) is also called zero profit point, breakeven point, breakeven point, profit and loss divergence point, and income turning point. Usually refers to the output when the total sales revenue equals the total cost (the intersection of the sales revenue line and the total cost line). At the limit of break-even point, when the sales income is higher than the break-even point, the company is profitable; otherwise, the company loses. The break-even point can be expressed by sales volume, that is, the sales volume of the break-even point; it can also be expressed by sales, that is, the sales volume of the break-even point.

Break-even point

When the profit is assumed to be zero and the profit is the target profit, the raw material breakeven is measured separately

BEP = Cf / (p-cu-tu)

Five calculation methods for breakeven point:

I. According to fixed fees, product unit price and

What is contribution? How to apply contributions? Contribution is sales and

Break-even point structure

Although the theory behind the break-even point chart is simple, because the boundary between fixed and variable costs is unclear, it is not so easy to obtain the ideal data when plotting. It would be unreliable if we regarded as effective classification without investigation. We guess that some kind of direct labor should be variable, but is this the case? It is likely that there will be fixed factors. The key problem is that constructing an accurate break-even point chart from the cost factors to reflect the actual characteristics of the relationship between cost factors and output requires a lot of upfront work. A good break-even point chart requires a good cost accounting system. Using cost scatter plots is another way to solve this problem. First mark the total cost data for several years in the graph, so that you can draw an average line accordingly. Assuming different sales in different years, the total cost line associated with sales can be driven from this. The point where this line intersects the vertical axis is the estimated value of the fixed cost. Let us look at the following data and plot it in Figure 5-3. The results look good and easy to get. But there is a question that we must ask, is whether the relationship between cost and sales more reflects the trend of inflation during this period, rather than reflecting the increase in cost as sales increase? What about a situation? If this is the case, the data must be scaled down in order to remove the effects of cost and price increases. It is also important that the data for several years represent a series of conditions, such as process, product variety and cost. If major process changes occur during this period, we cannot expect to provide a series of stable data based on a break-even point chart in these few years alone.

Why break-even points and profits change

Break-even point & amp; amp

Listed below are some of the items that may affect profit or have an impact on break-even points and profits.

1. Changes in sales. It has a direct impact on profit, but has little effect on the break-even point and contribution ratio.

2. Variety of products. Profits, break-even points, and contribution ratios all change. This requires drawing a break-even point chart based on the product.

3. Changes in labor or material utilization. Profits, break-even points, and contribution ratios will all change.

4. Changes in fixed costs. It will affect the profit and breakeven points, but not the contribution ratio.

5. Changes in sales prices. Profits, break-even points, and contribution ratios all change.

The impact of management decisions on the break-even point

Listed below are some important typical examples of decision-making.

1. Replacement of obsolete factories and equipment Even if existing assets are disposed of, fixed costs often rise. The most common reason for obsolescence is that new equipment may have been developed that reduces variable costs. There are two cases of the pure effect on the break-even point: one may not have any effect; the other may reduce the break-even point, which leads to an increase in profits. This is due to reduced variable costs (lower slope of the total cost line), or to lower variable costs and break-even points. Product design change is another cause of obsolescence, it will cause other forms of change.

2. Manufacture of components that were previously purchased in accordance with normal conditions. If the previously unused production capacity can play a role, the pure impact caused is only for variable costs, and variable costs have a break-even point. direct impact. If new equipment is needed, fixed costs will rise, so that the aspect and magnitude of variable cost changes will have a pure impact on the break-even point and gross profit.

3. The impact of purchasing a component that was previously produced by yourself will depend on the actual magnitude of the cost that can be sold. Some assets may be sold, but most fixed costs are retained. Variable costs can be changed in two directions: increase and decrease. The net effect on the plant's break-even point and gross profit can be positive or negative, depending on the assets sold and the associated margin of increased variable costs.

4. Decided to keep certain labor skills at the lowest point of seasonal fluctuations. Some variable costs have been changed to fixed costs. In this way, the plant's breakeven point may rise.

5. Decided to adopt overtime measures to increase production capacity. As variable costs increase, the breakeven point rises. Assuming output has increased, the net effect on profit depends on the correlation between the slope of the total cost line and actual output.

Use of break-even point analysis

The concept of break-even point is extremely important when analyzing many production issues and company-wide issues

of. However, it is worth noting that our best estimate of the company's breakeven "point" is actually just a fairly large "plaque" including the point itself. This is because it is inherently difficult to obtain accurate data on the ratio of fixed costs to variable costs, and because daily management decisions often change the break-even point. In multi-product comprehensive enterprises, the meaning of numbers has become rough and ambiguous. Therefore, the rough numbers obtained on fixed cost, variable cost, output and other items make many important details not so clear, so there are This is the case: Even if there are serious problems, it seems that the situation of the entire company is acceptable. For example, when calculating GM's total turnover, it must include cars, refrigerators, large internal combustion engines, trucks, washing machines, spark plugs, and many other items. The good results of one product or department cover up the bad situation of other products or departments. One point we must emphasize here is that for each product, a different break-even point chart should be used, which has certain significance. However, it is often difficult to reasonably allocate many costs, especially when the product variety is prone to change. The following situation is the easiest to see, that is, the products produced are of the same type, and the output can be measured by such as the number of pieces, or the number of units, tons, gallons, barrels, etc. In spite of these difficulties, it is important for the formation of budget control, profit planning and production processes. It is important to choose a conceptual framework and breakeven point analysis. It enables management to learn how changes in production or the course of action to be taken will affect the break-even point and profit.