Break Even Point

The break-even point is the point or state of a business at which there is neither a profit nor a loss. In other words, it is at this point where the contribution is equal to fixed expenses.

Cash break-even point: While computing the break even point if only cash fixed costs are considered, the break even point so computed is called cash break-even point. The computation of cash break-even-point excludes depreciation and other non-cash fixed expenses. Cash break-even point thus will give such a level of output or sales at which the sales revenue will be equal to cash outflow.

Cash break-even point = Cash fixed costs / Contribution per unit

Composite break-even point: It is a single break-even point in the case of firms manufacturing two or more products. Composite break-even point is determined by dividing the total fixed costs by composite P/V ratio.

The composite P/V ratio can be calculated by dividing the total contribution by total sales and multiplying by 100.

Composite break-even point. = Total fixed costs/Composite P/V ratio
Composite P/V ratio = (Total contribution/Total Sales) x 100

Cost-break-even point: It is a situation under which the costs of operating two alternative plants are equal. Though both the plants may have the same total costs, their total fixed costs and variable costs per unit may be different. In such a case, the firm may like to determine that point at which the total costs (fixed and variable) of operating both the plants are same. Such a point may be called ‘cost break even point’.

Cost break even point = Difference in fixed cost / Difference in variable cost per unit
Alternatively: The Cost break even point can also be determined by solving the following relation for the value of X.

Cost break even point

= Fixed cost of plant 1 + [Variable cost per unit of plant 1 x X]
= Fixed cost of plant 2 + [Variable cost per unit of plant 2 x X]

‘X’ in the above relation represents cost break even point