Explain Break Even Point. How does BEP help in making business decision?
Break Even Point (BEP) is a volume of sales where there is neither loss nor profit. That means contribution is enough to cover the fixed costs.
Thus, we can say that Contribution = Fixed Cost
Any contribution generated after BEP will directly result into profits as the fixed costs are fully covered now. BEP can be computed in two ways:
In terms of Quantity-
Fixed Costs / Contribution per unit
In terms of Amount-
(Fixed Costs) / (P/V Ratio)
BEP (Break Even Point) is the situation where there is neither loss nor profit. At this stage, the contribution is enough to cover the fixed costs i.e contribution is equal to fixed cost. Contribution generated after the break even point will result in profits for the organisation. Profit maximization is the motive of every organisation. Thus, every organisation use BEP as a base to take various decisions in regard to its sales volume and tries to increase it so that total fixed costs can be covered as early as possible and more profits can be earned.