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What is Break Even Point Analysis
Break Even Point Analysis (Cost-Volume-Profit Analysis) is an analytical technique that helps to identify critical sales volume at which the revenue equals to the costs.

Break Even Point Analysis (Cost-Volume-Profit Analysis), the abbreviation BEP is used. It is an analytical technique that helps to identify critical sales volume at which the sales equal to the costs. This volume is called a break even point.

Calculation:

Production and sales volume corresponding to the break even point qBEP is calculated for linear costs and sales as q from following equation:

Sales = Costs

p ∙ q = a + b ∙ q

After adjusting:

p ∙ q - b ∙ q = a

qBEP = a / (p-b)

Break Even Point Analysis chart 1

Conditions which make impossible to achieve break even point (and profit):

The situation may arise that the Break Even Point (and hence the profit) cannot be achieved. This is done under the condition that the price of the product (p) is less than the variable costs (b).

Break Even Point Analysis chart 2

Another case is that the BEP cannot be reached due to limited production capacity or small volume of effective demand.

Break Even Point Analysis chart 3

Break Even Point can be calculated also for the cash flow.

Use of the BEP in practice: Break Even Point Analysis helps to find particular point of rentability in time and facilitates the decision of launching new goods, service or technology. So helps selection of technology according to the implemented quantity and cost structure.

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Last update: 20.05.2016

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